Parents and students are finding the going tough these days when figuring how
best to finance the cost of college, with student loan companies in turmoil and banks tightening their standards and raising
rates on other types of borrowing.
Lawmakers and the Bush Administration are trying to head off any crisis by making
sure that “lenders of last resort” stand ready to take the place of private lenders that have left the federal
loan program. And a growing number of colleges have applied to participate in
the federal direct loan program, in which students borrow from the government. Whether
that will be enough to calm fears will not be known for several months.
As we know, most families use a combination of resources to pay for college,
drawing on savings, federal loans, bank loans and home loans to plug the gap between college costs and financial aid.
But fewer options create problems.
Sallie Mae, the country’s largest originator of student loans, is threatening
to not issue new loans this year because they are not profitable. Sallie Mae
has made big profits over the last 10 years making loans to students, selling the loans as securities, then using the cash
to make more loans. Now, however, investors in these securities are scarce. One reason is the floundering housing market in the U.S. Another reason is the federal government is cutting subsidies on the loans.
But is it really a crisis? Many in higher education claim the private
lenders are using scare tactics, overstating the hype in hopes of a government bailout.
Of course, the lenders deny those charges.
Private loans have grown sharply in popularity over the last 10 years, as families
have looked for ways to pay the difference between tuition, on the one hand, and their savings and federal loan options, on
the other. Last year, according to The College Board, students took out more
than $17 billion in private loans, up from just $1.6 billion a decade earlier. Still,
fewer than 10 percent of undergraduates borrow from private lenders.
Last year, students and their parents borrowed nearly $60 billion in federally
guaranteed loans, a figure that has grown more than 6 percent annually over the last five years. In recent years, the growth rate has declined but may pick up as the economy slows and as other borrowing
options fade.
Lawmakers in Washington have authorized increasing the amounts that students
can borrow through federal programs and authorizing the Education Department to purchase federal loans, thereby providing
banks with cash to make more loans. The House Education Committee has approved
legislation that would allow dependent students to borrow a total of $31,000 through federal programs to pay for their undergraduate
education, up from $23,000 now.
Students attending the wealthiest colleges will enjoy expanded financial aid,
as those institutions move to replace need-based loans with grants. Harvard and
Yale recently announced expansions of aid to families making as much as $150,000 annually, displaying a level of generosity
that few schools can match.
According to a recent New York Times/CBS News poll, 70 percent of parents
surveyed were “very concerned” about how they would pay for college; only 6 percent were not concerned. Frankly, we are surprised the number is not higher than 70 percent!
We will not know until the fall at the earliest the scope of the college lending
problem, but in this climate, our service could be more attractive as families explore all avenues in how they will pay for
college
