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Battling Over Bailout for Private Student Loans

November 21, 2008

When Treasury Secretary Henry M. Paulson Jr. announced a shift last week in how the federal government planned to spend the rest of its $700 financial rescue fund -- from buying financial firms' troubled assets to helping stimulate consumer spending by improving the flow of financing to banks and firms that loan money to individuals -- any student loan lobbyist worth his or her salt was probably drafting a letter of support within minutes. The plan suggested that the government was prepared to expand its previously planned efforts to ensure the flow of federal student loans -- which Education Secretary Margaret Spellings amplified Thursday -- and raised the specter that it could offer federal aid to providers of costlier, riskier and more controversial private student loans, too.

It wasn't only lenders who cheered on the idea, though. On Monday, the National Association of Student Financial Aid Administrators wrote to Paulson and Spellings not only to express its "gratitude and support" for the proposed shift of rescue funds to "aid banks and organizations that issue federal student loans," but to encourage their departments to extend the financial backing to non-federal loans, as well.

"The cost of attendance at many, many colleges is significant," the group's president and CEO, Philip R. Day Jr., said in the letter. "These schools traditionally have referred student borrowers to private education loan lenders to supplement the expenses not covered by their federal financial aid packages. Further, schools refer students who are ineligible for federal student aid to such private educational loan lenders. These students cannot attend college without private educational loans.

"I strongly urge you to take the next step by taking similar effective actions to ensure credit financing is available for those private educational loan borrowers that need it in order to pay postsecondary education expenses.... Without government intervention and correction of this aberration, countless students will be denied the financing they need to reach their higher education goals."

On Thursday, a chorus of other higher education groups, representing students, consumers and some colleges, weighed in strongly on the other side. In their own letter to Paulson, the groups -- which did not reference the NASFAA letter but seemed clearly intent on rebutting it -- vociferously discouraged the government from helping providers of private loans. (The signers were the American Association of Collegiate Registrars and Admissions Officers, the American Association of State Colleges and Universities, Campus Progress, Consumers Union, the National Consumer Law Center, the Project on Student Debt, National Association for College Admission Counseling, U.S. Public Interest Research Groups, and the United States Students Association.)

"Most students and families do not use private student loans to pay for college, nor should they," the groups wrote. "Private loans are risky and expensive, and lack the protections, oversight, and regulations of safer federal loans. Furthermore, providers of private student loans already receive special treatment in bankruptcy at borrowers’ expense. Billions of taxpayer dollars should not be spent enabling lenders to continue making these high-risk loans."

If the government is intent on aiding private student loan providers in some fashion, the groups say, any such agreement should use the opportunity to lower the interest rates and improve the terms of private loans, and strengthen the protections for borrowers who use them.

"A bailout for the providers of usurious private student loans will not solve the college affordability crisis caused by the failing economy, and would actually be detrimental to many students and consumers," the groups write. "However, if you continue to pursue any form of rescue for private student loans, it would be unconscionable to do so without also providing better consumer protections." (The groups' argument is much like the one that some commentators are making about a potential bailout of the Detroit automobile industry, suggesting that any aid that heads the companies' way must be tied to ensuring that they make serious changes in the way they do business.)

The Politics of Private Loans

The disagreement between the groups is only the latest glimpse into the politics of private student loans, which have intensified as dependence on the loans has grown along with colleges' steadily rising tuitions and what had been the flatlining of federal grant aid. While private loans still make up a relatively small minority of all student loans, they are increasingly depended on to fill the "gap" between the cost of attendance and the sum of federal, state and institutional aid for some students, particularly those at high-cost private and especially for-profit colleges. The loans tend to carry much higher interest rates and more restrictive terms for borrowers.

The credit crunch of the last year has had relatively little impact to date on the availability of federal student loans, in part because Congress and the Bush administration acted aggressively this spring to ensure the flow of those loans. But just as many lenders paid a heavy price for making mortgage loans to homeowners who couldn't possibly pay them back, so too did some student lenders make loans to borrowers who were unlikely to finish college and be able to repay the loans.

Many lenders in the last year have stopped making private loans because they have been unable to secure financing, leading some college officials -- particularly those at for-profit institutions where large numbers of students depend on such "gap" loans -- to complain that students are losing access to higher education. Many other college officials, and advocates for students, have taken the alternative view that many students who take out private loans have other, better alternatives, such as lower-cost federal loans or parent loans -- or going to less expensive institutions.

The concerns about borrowers' dependence on high-cost private loans is primarily what prompted the student and college groups to act, said Lauren Asher, associate director of the Institute for College Access and Success, of which the Project on Student Debt is a part. "Because private student loans have come up quite frequently as a potential target [of the bailout funds], we felt it was important to act swiftly and send a clear signal that this would not actually benefit students and borrowers," Asher said.

It's ironic that the government is considering using taxpayer money to help lenders who are in a tough situation, in part, because they made "risky loans to people who may not need or be able to afford them," said Asher. Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, another signer of the letter, put it more bluntly: "They want to bail these guys out so they can presumably go out and do more of what got them into this mess in the first place."

Although Paulson has not issued any formal plan to help private student loans so far, the groups hope that if the government cannot be discouraged from doing so, it will at least use the opportunity to rein in some of the practices that make such loans so detrimental in their eyes. "Private lenders that receive federal rescue funds should be required to offer more affordable fixed interest rates, income-contingent repayment options, and discharges in case of a borrower's death or disability," the groups write. "There should be ways for current private loan borrowers -- not only future borrowers -- to renegotiate more reasonable terms for their loan repayment. Congress must also reconsider their treatment of these loans in bankruptcy."

While the student and college groups were motivated to write Paulson mostly because of their concern about the impact of a bailout on borrowers, they were also inspired in part by their surprise that the financial aid officers' group had spoken out in support of the idea of rescuing private loan providers. They were troubled, too by the fact that the association had left the impression in its letter that private loans are widely used and that significant numbers of students would be denied an education if the administration did not act to help lenders.

"We were very disappointed that NASFAA took a position that we think is not in the best interests of students and families," said Asher. The aid officers' group's letter renewed criticism in some quarters that the association has grown too cozy with lenders and is putting their interests ahead of students -- a view its officials vehemently challenged.

"We reject that accusation outright, because it mischaracterizes who we are and what we're doing," said Justin Draeger, vice president of development at the aid officers' group. "NASFAA has always been about students. While it's true that a majority of low-income students aren't relying on private student loans, but what we're hearing from our members is that for students who need them, the requirements that the lenders have put in place make them almost unavailable."

Draeger said NASFAA "agrees with almost everything" that is in the letter from the student and college groups. "Obviously these [loans] are not a good thing, and we've said every chance we get that students should exhaust all forms of federal loans first. And we also agree that if private companies are going to utilize public funds, then there ought to be some sort of backstops in place. Making private lenders adhere to stronger standards, as [the other letter] suggests, is absolutely correct. We fully support that."

But even if NASFAA agrees that private loans are undesirable and that students' use of them should be discouraged and eventually ended, Draeger said, the signers of the other letter "ignore the reality that students, especially middle income and working class ones, have become reliant on student loans. In a perfect world, we wouldn't have private loans, but we're not dealing with a perfect world. Students are coming up short on paying for college, and private loans have become a significant and important part of students' paying for college.

"What we're hearing from our members," he added, "is that private loans have become a necessary evil, and as such, they just can't be yanked away unexpectedly this year," which is what many current and would-be borrowers are seeing happen -- a situation that is likely to be exacerbated if lenders get no help, Draeger said. "Simply taking away private loans completely in the middle of an academic year is not the way to fix the problem."

The groups may not be nearly so far apart as their letters would indicate. But none of the context that Draeger provided, of course, was in the breathless letter that NASFAA sent to Paulson.

 

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