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Unlikely Bedfellows on Student Loans

May 11, 2010

Maybe we can all get along.

An unusual coalition of lending, financial aid, and student groups have teamed up to urge members of Congress to require providers of non-federal student loans to get colleges' approval before they make such loans to students. In a letter last week to leaders in the Senate, three groups of lenders, two student groups and the National Association of Student Financial Aid Administrators asked Senate leaders to include such a provision in legislation (S. 3217) they are drafting to reform the country's financial system.

The proposal, a version of which was incorporated into parallel legislation that the House of Representatives passed last fall, is designed to assure that borrowers turn to more-expensive (and riskier) private student loans only after they've exhausted federal, state, and institutional grants, or at least less costly federal student loans.

"Requiring school certification that confirms students’ attendance and loan eligibility -- as is currently required on all federal student loans -- discourages unnecessary borrowing which could lead to delinquency and default during repayment," the groups say in the letter. "It also gives financial aid administrators an additional opportunity to counsel students about less expensive forms of financial aid and ensures that students do not inadvertently disqualify themselves for less costly aid. Simply put, school certification will help ensure that private loan borrowers maximize their ability to borrow federal loans and only turn to private loans after exhausting federal loan eligibility."

The letter was signed by Consumer Bankers Association, the Education Finance Council, and the National Council of Higher Education Loan Programs; the National Association of Student Financial Aid Administrators; and the Institute for College Access & Success and the U.S. Public Interest Research Groups.

It is not unheard of for banks and other lenders to be on the same side of issues as financial aid officers or advocates for students; a roughly similar coalition developed around the federal government's 2007 creation of a repayment system based on borrowers' post-graduation income, for instance.

But recent years have seen much more conflict than collaboration among lenders, students and financial aid officers, most evident in the fact that just two years ago, when Congress renewed the Higher Education Act, lenders were deeply divided over the idea of requiring college officials to "certify" that a student needed the money he or she was preparing to borrow from a private loan provider.

Because of the opposition, which came mostly from lenders who marketed their loans directly to student borrowers, the 2008 legislation instead required students themselves to obtain much of the same information (about their cost of attendance, the amount of federal aid they qualify for, etc.) that the original proposal would have mandated.

So what has changed from two years ago? A better question might be what hasn't.

The most obvious difference in the student loan market is that Congress passed legislation this spring that will end lending through the bank-based Federal Family Education Loan Program. Policy makers are hopeful that ending the competition between the federal government's two student loan programs -- whatever its other pros and cons, which were in the eye of the beholder -- will end the deeply divisive and distracting enmity that has dominated much of the federal conversation about student loans for nearly two decades, perhaps opening the door to much more cooperation among parties in the financial aid world.

The other enormous shift that has occurred is in the student loan market itself. Two years ago, there still appeared to be a vibrant market for direct to consumer student loans, so lenders that purveyed such loans successfully argued that channeling students through their financial aid offices could result in favoritism toward lenders with which financial aid officers had cozy relationships. But the bottom has more or less dropped out of the direct-to-consumer market for private student loans, as evidenced by the fact that one of the primary opponents of the certification process, MyRichUncle, is now out of business.

And Education Department data published last summer showing a sharp rise in the proportion of college students with private student loans, and in the proportion of private loan borrowers who had taken out those loans without first borrowing the maximum possible (or sometimes any at all) in lower-cost federal loans, offers persuasive evidence that federal policy lags what's happening in the market, said Pauline Abernathy, vice president at the Institute for College Access & Success.

"The broad support" for the idea of requiring financial aid offices to certify private loans is "an indication of the reality of how much the market has changed, and that it's time for policy to catch up to the market," Abernathy said.

The willingness of lenders to sign on to the certification proposal does not mean that they'll be backing significant reductions in private loan interest rates or embracing other ideas that hurt their bottom lines; the companies are still in the loan business for a reason, and their self-interest will only encourage them to go so far.

But whether lenders support the certification idea because they think it's wise or because they hope that adopting a "best practice" favored by consumer advocates will help reduce defaults and thereby forestall further (and potentially more painful) federal legislation, the level of cooperation is welcome to Justin Draeger, the newly selected president of the financial aid administrators' group.

"I think there’s an opportunity going forward to forge new alliances and partnerships to protect student aid funding and find common ground for student protections like school certification," Draeger said via e-mail. "I hope that this will be the first of many instances where NASFAA can drive consensus and help diverse stakeholders in the higher education community coalesce around concepts that work for and protect students."

 

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