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Hedging Bets on Student Loan Availability

March 13, 2008

In the debate about how seriously the student financial aid market is being affected by the tightening of the credit markets, many Congressional Democrats, along with advocates for borrowers with whom they are often aligned, have generally played down the impact to date, at least regarding students (as opposed to lenders).

But a day after a top aide to Sen. Edward M. Kennedy (D-Mass.) expressed skepticism about whether students were being hurt by the credit crunch, the senator set the stage during debate over the 2009 budget resolution on the Senate floor for a proposal that would increase the amount of federal loan funds that a student can borrow -- one of several changes that the lenders, for-profit colleges and others most worried about the credit crunch have sought.

Technically, the proposal from Kennedy -- offered as an amendment to the Senate's budget amendment for 2009 -- is nothing more than a procedural step that would only make it possible for Congress to increase loan limits or take other steps to ease the credit crunch later if it decides to do so. (In formal terms, it would "expand the deficit-neutral reserve fund for higher education in the Budget Resolution to ensure that it allows Congress to take any necessary action to increase the amount students can borrow under the federal student loan program.") Under Congressional budgetary procedures, it would be difficult for Kennedy or other lawmakers to seek to take expensive new steps to help borrowers later if they have not laid the groundwork -- and set aside a pool of funds -- in the budget blueprint that Congress is debating now.

In introducing his amendment, Kennedy, who heads the Senate's education committee, reiterated that right now, the tightening credit market is affecting mainly banks and corporations. But "we cannot allow the credit crunch to prevent our young people from going to college," he said, noting that he and Rep. George Miller (D-Calif.), who heads the parallel House panel, had already urged Education Secretary Margaret Spellings to ensure that the federal government had backup plans to "make sure that secure loan options are available to students in case the market collapses."

But more action may be needed, Kennedy said, especially because far too many students are having to turn to more expensive private (or alternative) loans to cover the difference between what they receive in federal grants and loans and what they must pay to attend college. (Kennedy attributed to the Education Department a figure -- far higher than previous estimates from the College Board and other sources -- suggesting that 40 to 60 percent of students who take out private loans have not taken "full advantage of the grant aid and low-interest loans they are eligible for under federal programs."

"This amendment allows for increases in eligibility for federal student loans in order to give students a better, lower-cost option than relying on private lenders," Kennedy said in his floor statement. That was as specific as he got -- he did not say from which federal loan programs he would allow students to borrow more, although student aid experts anticipated that to make such an increase cost effective, Kennedy would seek to increase access to unsubsidized Stafford Loans or parent loans, which are far less expensive to the U.S. Treasury because the government does not pay the interest on them while borrowers are in college, as is true for subsidized loans. (Federal law allows dependent undergraduate students to borrow up to $3,500 in subsidized loans as freshman, $4,500 as sophomores, and $5,500 for each remaining year, while independent students and those whose parents have been rejected for a parental loan can borrow thousands more in unsubsidized loans. There are cumulative limits as well.)

Advocates for students and borrowers -- with whom Kennedy is typically aligned -- historically have opposed increases in the annual and aggregate limits on how much federal loan borrowing a student can do, in the belief that higher limits will ultimately mean greater debt burdens for more borrowers.

Kennedy's proposal would seem to conflict with student advocates' long-held view. But some of those who have argued against higher loan limits in the past and urged caution on policy changes in response to the existing credit crunch challenged the assertion that Kennedy's proposal represented a break with them.

"I think he's doing the right thing in seeking to calm fears of parents or financial aid officers scared by newspaper headlines, and by demonstrating that Congress is ready to act should there be widespread problems for students themselves, as opposed to some lenders," said Michael Dannenberg, director of the Education Policy Program at the New America Foundation. Dannenberg said that Kennedy's plan should be viewed not as opening the door to students' borrowing more but as allowing them to shift their borrowing to less-costly federal loans rather than more expensive private ones.

But others said they feared ill effects. "I think that Senator Kennedy is attempting to intervene in good faith to avert a possible problem," Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, said via e-mail. "It’s unfortunate that the problem he has been handed is not particularly well understood by most policy makers, and that the solution he is offering is likely to have significant unintended consequences."

 

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