alt loans are only a symptom

Can anyone name a purchase where more disclosure is required of the buyer than securing a college education? The seller (that’s colleges, folks, not evil banks) knows trailing income of the borrower, and his/her parents; assets and debts; and myriad individual mitigating circumstances surrounding their financial means.

This knowledge permits the crafting of a financial aid package that maximizes the shakedown quotient per borrower, without scaring the sap off to some other school. All with the CYA Federal Methodology in case of any objections. Any methodology is only as good as the price tag that goes in up front. If a private loan is required to fill the gap, so be it.

Aid professionals won’t earn any brownie points by being disingenuous. It’s pretty hard to swallow the explanation that it’s ‘...difficult to intelligently advise students about private loans when they don’t know very much about the students’ financial situations’.

The paucity of hands-up at NASFAA speaks for itself. The community is realizing that it’s been used, for years. Used by the lenders, yes, but even worse so by their own administrations. Colleges have seats to fill, and financial budgets to meet. The price is the price, and the aid office is just following orders when collecting the tab.

There are a lot of genuinely shocked aid professionals out there that have been working quietly and competently for years, and the scales are falling from their eyes. Be angry, yes—but it’s time to direct that anger where it belongs: upstairs.

finaidfollies, at 5:55 am EDT on July 9, 2007

Re: Alt Loans Are Only a Symptom

Higher education is probably the second most prevalent example of successful implementation of the microeconomic principle of capturing “consumer surplus.” The first would be, of course, buying a car. Consumer surplus is loosely defined as the extra value that wealthier consumers receive from their purchases that they would have been perfectly happy to do without.

Unfortunately, the higher education implementation suffers from the need to appear benevolent as the goal of financial aid is to help the financially needy, yet qualified, students get into college. Right? Or is it merely a means to capture just a little more consumer surplus?

Ten years ago, private or “alternative” loans were just making their debut and were used by predominately middle class borrowers to fill a gap for between federally available aid and the cost of attendance at higher priced institutions and overall outstanding debt was manageable. They were seen as an “alternative” to using home equity loans, liquidating investments, or making other less-than-desirable financial decisions to finance education. It made sense for some with the means to finance a “Mercedes” or “Rolls Royce” education and pay for it over time. This was a reasonable model for capturing consumer surplus as according to research, big name schools yielded higher salary offers in graduates’ first jobs out of college. Graduates would make more and be able to afford the payments on the loans and those unwilling to sign up for the added debt would simply choose a “cheaper car” and attend a more affordable institution.

Today, in addition to their ubiquity at private schools, they have infiltrated the ranks of four-year public schools and community colleges as costs of attendance have risen, widening the gap between financial need and federal aid (gift aid and antiquated loan limits) that has not kept pace with massive tuition increases. This has put an entirely different economic class of borrower in line to borrow a private loan. A loan that could become impossible to repay as the amount of consumer surplus captured exceeds, over time, the amount of discretionary income generated by the consumer. Now, the “cheaper car” once chosen in lieu of private loan debt has become too expensive for many consumers, who, now choose to stay home.

Mark, at 10:50 am EDT on July 9, 2007

We have a society that does not plan for higher education. Students and parents can find the best cell phone option, best car loan or home mortgage. However, when planning for college, they never look at the real price tag until the bill arrives after registration. Then the shock hits. The drive to attend the “Best” colleges, compete with neighbors and feel that someone owes them something overrides good practical decisions. Who pays, how much, should I attend a public college, attend the low cost community college at home or should I go the the private college or to a public away from home with dorms are decisions that are not discussed or evaluated.

Little support for increasing aid levesl comes from Congress because they are too busy getting re-elected or giving tax breaks to the ultra wealthy.

We need to re-evaluate, as a society, how we fund higher education. Do we really understand needs analysis? Do we want a merit based set of programs? Are we willing to put our money into access to college for all students? Our future and their future depends on it.

mike, at 2:55 pm EDT on July 9, 2007

and...Macdonald’s provides nutrition counseling

“Nearly 6 in 10 respondents said that they help students with financial planning and debt management counseling. But just 35.5 percent of them said that guidance specifically mentions alternative loans, and just a quarter of college aid officials said that students at their institutions “receive in-depth loan counseling about alternative loans prior to borrowing.” Macdonalds makes available nutrition brochures regarding their products but I wouldn’t call it counseling.

To call it financial planning and debt management counseling is comical. Ask any student who has taken out a few loans what their payments will be upon graduation and what per centage their loans represent of their total expected income. The likely answer will be “alot” Ask parents what impact paying for college will have on their retirement and the likely answer will be “I don’t know or I’ll deal with that later.

Parents and students have no idea about college costs and less about how they will pay for it.

I agree with the statement that people spend more time comparing cell phone plans and planning their vacations than they do planning to pay for college.

Jack Girvan, Founder at Educational Funding Consultants, at 11:10 am EDT on July 10, 2007

Just Fix the Problem

Other comments aside, this is a real problem.

Loan-to-Learn, Laurel Collegiate, and Astrive are doing full-bore marketing blitzes to gain market share this year.

And with their “100% financing” marketing pitches, they are actively steering families away from federal aid programs.

They say “no federal forms to fill out,” as if that were a great benefit.

The solution is simple.

The DOE should mandate Private Loan Entrance Counseling the same way they do for Federal Stafford Loans.

All private loan borrowers should be made aware that:

a.) Federal loans are available, b.) Federal loans come with more attractive interest rates and fees, c.) If your parent is a co-signer, he or she should consider the Parent PLUS Loan first, d.) If you are a grad student, you should consider the Graduate PLUS Loan first, ande.) All federal programs should be exhausted before accepting a private loan.

Schools would require that all students indicate that they understand and accept these facts before the private loan could be certified by the school.

Non-certified private loans for undergrads (where a school certification is not required, and funds go straight to the student) should be illegal.

School certification is a necessary check and balance against over-borrowing.

Jim Andrews, at 3:30 pm EDT on August 15, 2007