Colleges Turn Away From Private Lenders
As Cuts in Subsidies to Banks Eat Into Benefits for Students,
Schools Start to Migrate to Federal Direct Loan Program
By ROBERT TOMSHO
March 25, 2008; Page D1
Schools like
For years, the small liberal-arts school relied on private lenders to make federal loans to its 2,500 students. Guaranteed by the government under the Federal Family Education Loan, or FFEL, program, such private loans routinely came with benefits like discounted loan-origination fees and lower interest rates for graduates who made automatic payments.
But recently, many lenders told Augustana they could no longer promise to provide such benefits, citing cuts in the federal subsidies they receive and troubles raising capital in the securities markets. Coming on top of last year’s ethics probes of the student-loan industry, it “really changed our whole outlook,” says W. Kent Barnds, Augustana’s vice president of admissions and enrollment.
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Problems are mounting in the student loan business, as many lenders have stopped providing loans through the Federal Family Education Loan program and other institutions may not be able to step in with support. WSJ’s Liz Rappaport reports. |
This fall, Augustana will stop doing business with FFEL lenders and join the federal direct-lending program. Under it, students borrow from the federal government through their colleges, and private lenders are eliminated from the picture.
So far this year, nearly 60 other institutions have moved to direct lending or applied to do so — including the mammoth
The federal government sets the interest rates and benefits for direct student loans. It sets maximum interest rates for FFEL loans, although lenders are free to offer discounts and benefits of their choosing. Because the two programs involve different processing systems, few institutions actively participate in both and students rarely get to choose between them.
Private lenders still dominate the federal student-loan market, estimated at $114.8 billion in fiscal 2007, which includes
But for the many students whose schools don’t participate in direct lending, borrowing stands to be more expensive for the 2008-09 academic year, as private-lender rebates disappear. Additional disruption could erupt if lenders now accepting FFEL loan applications withdraw from the program before the school year starts.
Financial-aid administrators say it is more important than ever to shop around for a lender and not to wait until summer to do so, as many students and parents traditionally do. On the political front, Democratic presidential contenders Hillary Clinton and Barack Obama have both indicated that, if elected, they would eliminate the FFEL program in favor of direct lending.
Many college administrators say the FFEL program still offers advantages. Sarah Bauder, financial-aid director of the
But big lenders such as College Loan Corp. and the Pennsylvania Higher Education Assistance Agency, or PHEAA, have said they will stop making FFEL loans for the fall term. Monday, Brazos Higher Education Service Corp., in
No Crisis Foreseen
For the moment, most observers don’t foresee the sort of crisis in FFEL loan availability that could spark a wholesale rush to direct lending. Although students won’t begin borrowing in earnest for the 2008-09 academic year until late spring, Department of Education officials have yet to spot any problems with loan availability, and lending volume for both federal programs has been typical for this time of year.
Financial-aid professionals say nearly 2,000 lenders are still making FFEL loans, including big banks that aren’t solely dependent on securities markets for funding sources.
Congressional leaders want the Bush administration to make sure the direct-lending system is ready to take on additional loan volume on short notice if many other schools follow
Department of Education officials believe they could readily handle double the $13 billion in direct loans they processed in fiscal 2007, although a bigger increase is likely to require more planning.
The
But along the way, some were also offering colleges and their administrators the sort of travel junkets, financial perks and alleged kickbacks that sparked last year’s conflict-of-interest investigations by Congress and New York Attorney General Andrew Cuomo. As a result, dozens of schools adopted tighter ethics codes and Congress last year passed the College Cost Reduction and Access Act. It sliced more than $20 billion of the federal subsidies that have given private lenders a competitive edge by allowing them to offer better loan terms, roughly halving them.
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“The scandal contributed to the political environment that made the deep cuts possible,” says Kevin Bruns, executive director of
Narrowing Differences
Yet the competitive differences between the two programs are narrowing. The federal government is phasing out its loan-origination fees, which private lenders used to pay on borrowers’ behalf, and is offering rebates to borrowers in the meantime. A 2005 federal law set the interest rate for direct PLUS loans for parents and graduate students at 7.9%, compared with a maximum of 8.5% for FFEL loans. And the direct-loan program is offering a new perk for borrowers who take public-service jobs, such as teaching: If graduates work in public service for at least 10 years, they get their loans forgiven.
On the FFEL side, interest-rate discounts are harder to find and benefits have been trimmed. MyRichUncle, the lending concern owned by MRU Holdings Inc., is offering undergraduate Stafford loans with a 5.8% interest rate — a full percentage point below direct Stafford loans — but the lender will no longer discount interest rates on federal PLUS loans.
Meanwhile, Cleveland-based KeyCorp has eliminated most of its benefits to borrowers, Wachovia Corp. has reduced the maximum rebate that Stafford borrowers can get for on-time repayments, and Wells Fargo & Co. has eliminated some so-called back-end benefits, such as immediate interest-rate reductions at repayment.
Write to Robert Tomsho at rob.tomsho@wsj.com
