Response to the Boston Globe on the Student Loan “Crisis”

by Deanne Loonin
(Director of the Student Loan Borrower Assistance Project)

There are many changes going on in the credit world generally and in the student loan industry more specifically, but the April 17 front page article in The Boston Globe, “Credit Crisis Leaves Students Unable to Count on Loans” presents a distorted picture. This misleading article is a disservice to students and their parents who are trying to figure out what is really going on.

The article opens with Anthony Norton, a student at UMass whose funds were temporarily cut off after TERI’s bankruptcy. This was a temporary glitch, no question, but it involved private student loans only. The article fails to make this essential distinction. TERI’s bankruptcy will have no affect on the federal loan programs because TERI only guaranteed private loans. Federal loans, in contrast, are guaranteed by the government. Although private loan volume has grown in recent years, federal loans are still the primary lending resource for students and their families.

The article quotes Northeastern’s financial aid director Tony Erwin that the days of easy access to student credit are over. In fact, there has been no change in a borrower’s ability to access federal loans. And the loan terms, which are strictly regulated by federal law, haven’t changed either. Yes, some private lenders have left the federal loan business, including Massachusetts-based MEFA, but there are still plenty of private lenders taking up the slack as well as a government-based Direct loan program. Senator Kennedy has taken a leadership role in monitoring the federal loan situation and pushing the Department of Education to develop contingency plans if access is truly threatened.

Perhaps Mr. Erwin was referring only to private loans when he was quoted as saying that student loans will be harder to come by and more expensive. In that case, the story should have focused on trends in the private student loan industry. Further, it should have highlighted that credit checks are nothing new in this business. Tighter standards may be a new trend, but there is such a dearth of data about the private student loan business that we don’t yet know if this is occurring and if so how widespread any such changes might be. With respect to access to private loans generally, private lenders have so far been cutting back mostly on their subprime (the most expensive loans) rather than their prime loans. Note, for example, that MEFA has chosen to exit the federal loan business, but stay in the private loan business.

Unfortunately, this article feeds into a general media trend of misleadingly portraying lenders on one side crying that the sky is falling and consumer advocates and others stuck in the “everything is fine” camp. As in so many cases, the real picture is more nuanced. There are some very serious problems with the student loan industry. These should be reported responsibly so as to avoid unnecessary panic among students and parents. The media can help reassure students that the federal loan programs are alive and well and should always be the first choice to finance higher education. (this is noted in the “Tips” section of the article). The private student loan market is more volatile due to a host of reasons, including lenders that aggressively marketed unaffordable loans. Despite the volatility, prime borrowers in particular should still have access to private loans. They might have to shop around more and might have to provide additional evidence of credit worthiness, but this is hardly a crisis. It is in some ways a good thing if it signals greater responsibility on the part of lenders to make loans only to those who can afford to repay. We can then turn our attention to promoting equal access to education in ways other than high rate lending, which leaves many borrowers buried in debt.

Comments

[infomercial producer]

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-Daniel

[Student Loans]

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[No Fax Payday Loans]

Because of the credit crunch problem, student loans have been affected. Some of the loan companies had stopped the transactions in allowing the students to have loans. This is the very big problem of the students and parents. How can now the students continue their studies if the loan companies did not support them anymore? This is really horrible. The government should do an action regarding this controversy. http://personalmoneystore.com talks about the recent issues in the loan industry particularly the No Fax Payday Loans.

[deepak student loans]

These unsecured loans' features will also help you to build a budget and stick to it easily. When credit cards are included in a budget, the complexity increases because you have to foresee many things in order for the budget to be useful. Predicting ones behavior is complicated enough, if you have to predict market conditions and income variations in order to see if you will be able to meet credit card payments that keep changing as a consequence of a variable rate, things can get really complicated.

[Valerie Rodd]

What does this mean for Canadian students studying abroad who rely on American Canhelp loans? Canadian banks won't touch Canadian students who study abroad. Our only hope for our daughter studying to become a veterinarian in Australia is relying on Canhelp loans. There is a huge crisis, let me tell you! Canhelp has stopped processing the applications which has left us high and dry. What is our recourse now?

[Valerie Rodd]

What does this mean for Canadian students studying abroad who rely on American Canhelp loans? Canadian banks won't touch Canadian students who study abroad. Our only hope for our daughter studying to become a veterinarian in Australia is relying on Canhelp loans. There is a huge crisis, let me tell you! Canhelp has stopped processing the applications which has left us high and dry. What is our recourse now?

[Deanne Loonin]

Yet another distorted view from today’s Boston Globe, once again on the front page. (I keep picking on Boston because I live here, but this distorted coverage is happening everywhere). The April 19 article, titled “College-bound face dilemma” gives us the “news” that not everyone can afford to go to a first choice college. Yet the article does not give a single example of a student who needed a private loan to finance that choice and was turned down. Instead we get speculation that the “uncertainty surrounding the burgeoning student loan crisis” means that students may have to reject $50,000/year choices for slightly cheaper choices. This might be true, but not because of changes in student loans. As I’ve already said (over and over), despite the volatility in the markets, access to federal loans is unchanged. This includes parent PLUS loans, which can be used to finance gaps in financial aid packages. Parents who can’t pass the minimal PLUS loan credit check may have problems, but turning to private loans is not necessarily the best answer for them. As is documented in a recent NCLC report, private student loans are not always what they seem to be, usually worse, especially for those with lower credit scores. (see http://www.studentloanborrowerassistance.org/uploads/File/Report_PrivateLoans.pdf

Today’s Globe article also notes that community colleges might see an up tick in enrollment as students reject pricier schools. Is this such a bad thing? Not necessarily, although an excellent report released this week by the Project on Student Debt shows that many community colleges do not participate in the federal loan programs, hopefully something that can be remedied soon. (see http://projectonstudentdebt.org/pub_view.php?idx=329).

There may be a silver lining to the distorted media coverage if it helps students and parents wake up to the realization that higher education IS a financial decision. And guess what? People with less money have been forced for years to choose schools based on affordability. Is it right that someone has to give up a dream of attending NYU and instead go to UMass Amherst as is reported in this article? Hard to say (and we here in MA think pretty highly of UMass Amherst). Regardless, education dreams have always come at a cost for borrowers with lower incomes. Our current educational system is inequitable and gives greater access to those with more money. We should work to change this, but reform is never going to come by students and families piling on private loan debt.

For a good article on what’s really going on, see http://chronicle.com/daily/2008/04/2533n.htm. As Paul Basken notes in this article, “Compared with the perplexed politicians and the cash-strapped private lenders, students might end up being the ones who experience the least disruption.” Let’s make sure students and their parents know that rather than creating panic just to sell newspapers (or blogs).