Private-Loan Reliance Worries Colleges

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From the issue dated June 13, 2008

Private-Loan Reliance Worries Colleges


At many colleges across the nation, as administrators fret about the effects of a worsening economy, students arriving this fall will get more help securing jobs and more advice on paying for their educations. Some students will even find colleges willing to cut their tuition bills.

Yet as banks tighten standards for private college loans, families and institutions remain uncertain about whether such incremental steps will be enough to keep large numbers of students from bailing out. The threat may be greatest at smaller private institutions, where limited enrollments and relatively high tuitions can magnify budget stresses.

"At this point, it hasn't hit us too hard," said Thomas G. Ball, director of financial aid at Grove City College, in Pennsylvania. "But down the road, it's hard to say."

Public alarm over the much-ballyhooed student loan "crisis" may be fading with last month's announcement by Education Secretary Margaret Spellings of a rescue package for loan companies, created after Congress sought to provide safeguards for students, institutions, and lenders.

Yet that package was designed only to encourage banks to stay in the federally subsidized loan system. Largely untouched by the federal bailout is the less-regulated and quickly expanding market in private loans, which banks issue to students without government subsidies or repayment guarantees.

That lack of government protection means many students and their families, as economic conditions worsen, may face greater restrictions and costlier terms as they seek private loans to cover gaps left by federal loans. And that dynamic, industry experts are warning, could quickly translate into problems for many colleges, especially those already struggling to help their students pay their bills.

"There are an awful lot of those families who have depended on debt to finance the costs of college," said James H. Day, a principal at Hardwick-Day, a Minnesota company that provides advice to colleges on enrollment. "And they're going to have some problems."

That could quickly turn into problems for colleges, Mr. Day said. "This is one of those crises that's not going to be visible until it is."

Use of Private Loans Grows

As college costs continue to outpace inflation, private loans made up 24 percent of total education loans in 2006-7, up from 6 percent a decade ago, according to the College Board.

College leaders are clearly aware of the potential for problems. Financial-aid directors and enrollment managers at many institutions say they monitor the credit markets closely and are devising plans to help their students cope with tougher economic conditions.


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Some institutions already acknowledge emerging problems, with officials reporting the need, for instance, to accept lower-performing students to meet enrollment projections. Yet most aid directors and enrollment managers

contacted for this article said so far they were expanding existing student-assistance programs rather than creating new ones, and none described seeing conditions that warranted any emergency-type measures.

"We are not looking at any radical solutions to the credit crunch," said Mr. Ball, of Grove City College.

Grove City, with about 2,500 students, may be in a better position than many small colleges, having renounced the federal loan program 12 years ago after the Presbyterian institution waged a court battle over its right to set its curriculum free of government interference.

The college has held down its price, which will be $18,514 this coming academic year for tuition, fees, and room and board, compared with an average of $32,307 charged by private four-year colleges this past academic year. Meanwhile, Mr. Ball said, the college has arranged private student loans through a prominent local bank and built a nationally ranked career-placement office.

Other small-to-medium-size private colleges are also taking a wait-and-see attitude before making any drastic changes in operations. Some of them, such as Mount Holyoke College, in Massachusetts, say their strong national reputations help them continue to attract students even in the face of cost pressures.

"We're not feeling right now that it could be a big problem for us," said Kathryn P. Blaisdell, director of student financial services at Mount Holyoke, which will charge $48,686 in tuition, fees, and room and board for the coming academic year. When its students graduate, they carry an average debt of about $24,000.

The trends in lending are not all bad. In some cases, college officials said they had found that banks were lowering their rates on private loans when the student had a co-signer with a strong credit history. Even colleges that do not enroll large numbers of affluent students describe seeing only limited examples of banks toughening their policies on private loans.

Also, the rescue legislation approved by Congress that gives Ms. Spellings the authority to offer aid to the loan companies increased the amount students can borrow under the federal program by $2,000, further reducing the need for students to pursue private loans. Undergraduates will now be allowed to borrow up to $5,500 in federally subsidized loans in their freshman year, $6,500 as sophomores, and $7,500 each year after that.

Colleges Watch Competition

At Green Mountain College, in Vermont, which charges $35,000 in annual tuition and residential expenses, administrators expect to lose more students than usual this year to lower-priced competitors, said Sandra C. Bartholomew, dean of enrollment. In response to the tough economic conditions, the college will expand its financial counseling and direct more of its institutional grant aid to high-performing students, Ms. Bartholomew said.

At the same time, college officials see little indication of problems that are specifically tied to the loan crunch itself. "There could be some issues, but right now we haven't really seen any," Ms. Bartholomew said.

Elsewhere, Saint Mary's College, in Indiana, where students this fall will pay $37,150 in tuition, fees, and room and board, is helping its students find jobs on the campus, said Kathleen M. Brown, the college's director of financial aid.

The institution is also working harder to make students aware of their total debt load, in part to encourage them to take advantage of such job opportunities, added Daniel L. Meyer, vice president for enrollment management. Nevertheless, the college, like Green Mountain, still has not seen any effects from the crunch in student lending, Ms. Brown said.


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One institution that does acknowledge harm due to recent changes in private-loan availability is the Savannah College of Art and Design, which enrolls about 9,000 students.

The college charges $34,266 in tuition and room and board, with students taking out a total of $26-million a year in private loans and leaving the institution with an average debt of about $28,000. To help students cope with such costs, the college distributed about $55-million in institutional scholarships this past academic year, up from $39-million the previous year, said Scott Linzey, vice president for enrollment management.

But the college doesn't expect to be able to sustain that level of aid this coming year, and it already sees a slight decline in the average SAT score of its incoming class, said Pamela E. Rhame, senior vice president for


College officials are considering ways they might limit that trend by better focusing the aid they can offer, through tactics such as matching merit-based scholarships offered to students in neighboring states, Mr. Linzey said. The college also plans on "being much more public" about the availability of such scholarships, he said.

Some for-profit institutions, which enroll students year-round, have already begun preparing for reductions in private loan availability. They include the Corinthian Colleges chain, which is now more discerning in admissions, works harder to find jobs for its graduates, and provides its own guarantees of student-loan repayment, said Trace A. Urdan, an education-industry analyst with Signal Hill, an investment firm.

Tougher conditions on private loans could also affect community colleges. A report in April by the Project on Student Debt found that more than one million community-college students, a disproportionate number of them members of minority groups, are not able to get government-subsidized loans because their institutions do not participate in the federal program.

In general, however, community colleges and their students should not be alarmed by problems in the private-loan market, said David S. Baime, vice president for government relations at the American Association of Community Colleges. Students at community colleges that don't participate in the federal program "are generally discouraged from borrowing altogether," Mr. Baime said. And for others, any decline in the availability of private loans "is a relief, because now the students are receiving better terms and conditions by taking out federal loans," he said. Over all, the responses of colleges don't yet appear to match the potential size of the problem, said Mr. Day, whose company advises institutions on their responses to crises in areas of financial aid and enrollment management. The credit problem that colleges will have to help their students face is greater than just the tougher conditions on private loans and includes families coping with the loss of equity as home values decline, he said.

Assuming that one-quarter of all borrowing against home-equity lines of credit is used to pay for college, the shrinking of home values in recent months means the U.S. system of higher education has just lost about $30-billion in potential income, Mr. Day said.

Public colleges are not immune, even if the effects of the credit crunch are most pronounced at the less selective of the private institutions, he said. Some public colleges have also prepared to mitigate potential problems. Northwest Missouri State University is expanding a program that now places more than 1,100 students in jobs across the campus. The jobs, many of which were previously handled by professional staff members, even include writing speeches for the campus president, Dean L. Hubbard.

The program, which began three years ago, lets students earn as much as $43,000 during their four years of study, while saving the university about $6-million a year in salaries and benefits, Mr. Hubbard said.

But Mr. Day said that such an example of preparation for an economic crisis in the fall appears to be the exception. "When this hits, if it hits the way a lot of people think it will hit, it's likely to be really across sectors and across institutions, in a way that just doesn't see the effect visited upon a few unfortunate losers," Mr. Day said. "I think there's a lot of losers."


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From the issue dated June 13, 2008

Rising Tuition and Clever Marketing Drive Growth

of Private Loans

As students unwittingly forgo cheaper borrowing, Congress tries to steer them toward federal loan programs


The scene: a fast-food drive-through. Two guys waiting to order their food wonder how they're going to come up with thousands of dollars to pay for their college tuition. Suddenly a voice emerges from the plastic cowboy next to their car.

"You both just need to Think," says the cashier over the intercom. With Think Student Loans, she continues, you can borrow up to $40,000, have it sent to you in as little as five business days, and you don't have to pay a cent until six months after you graduate.

"Six months?" ask the incredulous students.

"Nothing," she reiterates. "Now drive through, and I'll give you the number to call."

The advertisement, which was viewed hundreds of times on YouTube, is one of dozens of pitches for private loans appearing on the Internet, television, and radio. Like the Think a d, most of them promise fast, easy money and no payments until six months after graduation. Some advertise interest rates at the low end of an undisclosed range. What the ads often fail to mention is that federal loans offer the same grace period, more repayment options, and — almost invariably — better interest rates.

That omission may help explain why one in five private-loan borrowers forgoes less-expensive federal loans, even though many are eligible for them, advocates for students and consumers say. They complain that the private lenders' ads deliberately blur the lines between federal and private loans, tricking borrowers into taking on more-expensive private debt.

For borrowers, the consequences can be costly. While interest rates on federal loans are fixed, now at 6.8 percent, interest rates on private loans vary. The rates, based on market conditions and borrowers' credit ratings, often reach double digits. And while federal loans can be discharged through bankruptcy, it's almost impossible for borrowers to wipe out private-loan debt if they run into financial trouble.

Now, with private lending growing 10 times as fast as federal lending, Congress is taking steps to educate borrowers about the differences between federal and private loans. Last year the U.S. House of Representatives passed a bill to reauthorize the Higher Education Act that would require private lenders to provide borrowers with multiple disclosures about terms and conditions and notify them that they may qualify for lower-cost federal loans. The bill, which is being reconciled with the Senate's version, would also require private lenders to obtain from a borrower's college certification of his or her enrollment status and cost of attendance before issuing any loan funds.


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Supporters of the legislation say those provisions would help borrowers distinguish between private and federal loans and give financial-aid offices an opportunity to counsel their students to exhaust their federal eligibility first. They say colleges are often unaware when their students take out loans marketed directly to consumers, because private lenders are not required to certify private loans with the borrowers' institutions.

Few lenders oppose the disclosure requirements, but the certification proposal has them divided.

Companies that market their loans through colleges tend to support the changes, arguing that more openness could help restore borrowers' confidence in the wake of a yearlong investigation into conflicts of interest in the

student-loan industry. But direct-to-consumer lenders, whose business could suffer if colleges start warning students off their loans, argue that certification could reopen the door to some of the abuses uncovered in the investigation, like the practice of aid administrators steering students to preferred lenders.

Some lawmakers, including the chairman of the Senate education committee, Edward M. Kennedy, Democrat of Massachusetts, and the leaders of the Senate banking committee, have voiced similar concerns. Negotiators continue to work on a compromise.

Meanwhile, members of Congress and Andrew M. Cuomo, New York's attorney general, are turning up the heat on federal regulators, accusing them of being lax in their oversight of the private-loan industry and urging them to crack down on misleading advertising.

Private Lending Proliferates

Last year, borrowers took out $17-billion in private loans, more than 10 times as much as they did a decade earlier, according to the College Board. During the same period, federal borrowing less than doubled. (See chart.) Until recently most private loans went to graduate and professional students. But over the last decade, as college costs have risen and state and federal aid has lagged, a growing number of undergraduates have begun turning to private loans to fill the gap. In 2004 undergraduates made up 83 percent of all private-loan borrowers, says a report by the Institute for Higher Education Policy.

The majority of those undergraduates took out private loans only after they reached the annual federal-loan limits. But 20 percent of borrowers who were dependent on their parents an d 25 percent of independent borrowers did not take out federal loans at all, even though many of them would have been eligible.

Researchers offer several explanations for why some students shun federal loans. In some cases, students may be wary of providing financial information to the federal government, or they may consider the federal application process too difficult. A recent analysis by the American Council on Education found that half of the borrowers who took out private instead of federal loans in 2004 did not file the Free Application for Federal Student Aid. In other cases, the borrowers may just be confused. A recent report by the Consumers Union, publisher of Consumer Reports,

found that students and parents could not identify the best-priced loan or explain how loan-repayment obligations could affect a student's future career and financial decisions. The report criticized colleges, high schools, lenders, and other groups for taking a "scattershot" approach to educating families about how to pay for a college


While a few colleges, like Barnard College and Colorado State University, counsel students individually before certifying their private loans, efforts to educate borrowers vary widely across institutions, and many colleges offer little more guidance than a list of recommended lenders. In a 2007 survey that the National Association of Student Financial Aid Administrators conducted among its members, only a quarter of respondents said they gave students in-depth counseling about alternative loans before they borrowed.

In some cases, colleges may not even be aware that their students are taking out private loans. Financial-aid officers who responded to the Nasfaa survey estimated that up to a quarter of private loans made to their students


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were issued without the aid officers' knowledge.

The bill before Congress would change that, requiring lenders to go through the financial-aid office to get to the borrowers. It would also require colleges to inform borrowers of their remaining eligibility for federal loans before providing students with information about private loans.

Those changes could help borrowers like Deborah Olszewski's two daughters, who took out private loans to attend New York University after consulting with the college's financial-aid office. Ms. Olszewski says she assumed the loans were federal and was horrified to discover they carried an interest rate of 13 percent.

But opponents of certification, including some companies that offer private loans, worry that financial-aid offices will steer students toward lenders that have offered their institutions perks.

"It's predictable that they will pick lenders on their preferred-lender list or ones they have arrangements with," said Karin Pellman, a spokeswoman for MyRichUncle, a direct-to-consumer lender that has angered many

financial-aid advisers by running ads that question their integrity.

Justin Draeger, a spokesman for Nasfaa, said that while individual financial-aid officers "may have a private opinion on lenders and loan programs, that doesn't mean we don't administer them professionally."

While the bill would require colleges to certify loans from all lenders or risk losing their eligibility to award federal aid, it does not specify how quickly they must do so. Theoretically, colleges could certify some loans immediately and drag their feet on others, raising the chances that their students will borrow from a favored lender.

But the bill has built-in safeguards, too. Under language added to the measure in response to the student-loan scandal, colleges would be barred from accepting gifts from lenders or participating in "revenue sharing" agreements, which give colleges a portion of the profits on loans taken out by their students.

Those provisions would help "protect students from any questionable relationships that keep them from getting the loan of their choice," said Rachel Racusen, a spokeswoman for Rep. George Miller, the California Democrat who is chairman of the House education committee.

Despite those assurances, some lawmakers remain wary of certification. They worry not only about steering but also about the bottlenecks that could occur during peak processing periods. Certification is among the issues still under discussion as House and Senate negotiators hash out a compromise.

Cracking Down

Meanwhile, Mr. Cuomo and federal lawmakers are putting pressure on the Federal Trade Commission and other agencies to step up their oversight of the largely unregulated private-loan industry.

The Federal Trade Commission, which polices deceptive marketing, has never taken action against a private student-loan company for misleading or fraudulent advertising. A year ago, the agency dismissed a complaint by the United States Student Association against EduCap, a private lender, saying the agency could not take action because nonprofit groups do not fall under its jurisdiction.

At a hearing before the Senate banking committee a year ago, Mr. Cuomo, who spearheaded the investigation into conflicts of interest in student lending, accused the trade commission and other agencies of failing to protect student borrowers from deceptive marketing and similar abuses. He likened the private-loan industry to the "the Wild West of the college-loan business."

Two months after that hearing, Secretary of Education Margaret Spellings convened a meeting with the leaders of the trade commission, the Treasury Department, and several other federal agencies to coordinate federal oversight of private lending. The group has met periodically since then, and the Education Department and trade


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commission are preparing to publish educational materials that seek to protect students and parents from deceptive advertising, a department spokeswoman said.

In March the Department of Education, which has no existing authority to regulate private loans, published "Federal Aid First," an online and print brochure with information about the differences between federal and private student loans. The department has also begun its own marketing campaign, running a series of public-service ads publicizing the availability of federal student aid.

Meanwhile, investigations into the marketing of private loans continue. The Government Accountability Office is looking into whether nonprofit lenders abuse their tax-exempt status and engage in deceptive marketing. And Mr. Cuomo, who served subpoenas to 33 lenders in October, continues his inquiry into whether direct-to-consumer lenders have misled borrowers into taking out private loans. Section: Students

Volume 54, Issue 40, Page A24

Copyright © 2008 by The Chronicle of Higher Education




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