House Panel Addresses the Would-Be Student Loan Crisis

Acknowledging little impact so far on students or colleges, Congressional committee takes first steps to help lenders and protect borrowers if capital markets constrict further.
April 10, 2008

The student loan "crisis" that has gripped the lending world, deeply troubled the for-profit higher education sector and captivated business reporters formally landed in Congress Wednesday, as a House of Representatives committee unanimously approved legislation designed, as the first paragraph of the panel's news release suggests, to "provide new protections, in addition to those in current law, to ensure that families can continue to access the loans they need to pay for college."

Even that opening paragraph of the news release, though, underscores the fundamental oddity of this would-be crisis. "While no student or college has reported any problems accessing federal student aid to date" (emphasis added), it begins, "it is only prudent for the federal government to make sure that contingency plans are in place that would provide students and families with continued, uninterrupted access to federal loans, regardless of what’s happening in the credit markets."

A significant number of banks and other student loan providers have clearly been hurt by the credit crunch that has made it difficult, and in some cases impossible, for lenders to raise money to issue new loans. And there is also little question that some commercial colleges have become deeply worried that their students, many of whom come from low-income backgrounds and may not qualify for private loans to buttress the federal financial aid they receive, will be unable to borrow enough to pay for their educations.

But despite reports that a few traditional colleges have confronted enough potential disruption to their students' access to federal loans to prompt them to make the switch from the lender-based guaranteed student loan program to the government's competing direct loan program, to date most college officials have not joined their for-profit colleagues and lending officials in calling for federal intervention. (Because of the nature of how they award aid, most traditional colleges would be just beginning to confront a lack of availability of loans for their current and prospective students, so the picture will become clearer in the next month to six weeks.)

Amid increasing numbers of news articles that warn in sometimes overheated language of potential disaster for students and families, politicians and college officials alike have sought to strike a balance between inciting more worries by calling for aggressive action or appearing to be insensitive to the potential harm that could unfold if students were truly to lose access to college loans -- a position no member of Congress wants to be in an election year.

Walking that line, leading Democrats in both houses of Congress have proposed legislation that would both expand the options available to student borrowers to finance their college educations and provide some additional federal support to enable lenders to continue to make loans. The legislation the House Education and Labor Committee approved Tuesday would:

  • Raise the annual limits on the amount of federal loans a student may borrow by $2,000 for all students, and increase the aggregate loan limits to $31,000 for dependent undergraduates and $57,500 for independent undergraduates.
  • Allow borrowers to defer repayment of federal parent PLUS loans while the student is enrolled in college, and change the law so that parents who need PLUS loans to send their students to college don't lose access to such loans because they are having short-term trouble paying their mortgages.
  • Require the secretary of education to designate guarantee agencies as “lenders of last resort” for an entire college rather than on a student-by-student basis, and clarify that the secretary can provide these lenders with capital to make the loans.
  • Permit the Department of Education to serve as a “secondary market of last resort” that would buy loans from lenders in the Federal Family Education Loan, or guaranteed loan, program that have been otherwise unable to raise new funds.

“We have taken critical steps today toward ensuring that the credit crisis in the financial markets does not jeopardize our federal student loan programs,” said Rep. Rubén Hinojosa (D-Tex.), chairman of the House Subcommittee on Higher Education, Lifelong Learning, and Competitiveness, who co-sponsored the bipartisan bill. “This legislation signals that the federal government is prepared to use all the tools at its disposal to make certain that the subprime mortgage crisis does not trigger a college access crisis."

Not surprisingly, the passage of the bill earned applause from lenders and predictions that the legislation would "represent a significant boon to the for-profit post-secondary companies," as Trace Urdan, an analyst with Signal Hill, put it in an e-mail message Wednesday.

But it also came in for some criticism from advocates for students. The U.S. Public Interest Research Group and the United States Student Association sent a letter to members of Congress in which they generally praised the expanded flexibility for parent loans but expressed a mixed assessment of the expanded loan limits. Raising the amount of federal loan money students can borrow will help some students replace more-expensive and riskier private loans with less-costly federal ones, but for others, "they will just be utilized by schools to get kids deeper into debt," said Luke Swarthout, higher education advocate for U.S. PIRG.

"While the Committee hopes that the expanded limits will only be used by students who would otherwise have to borrow at a higher rate, the actual impact for some will be increased tuition and more debt at institutions whose tuition has historically been pegged to federal aid, and virtually all of whose students are low-income aid recipients," the groups said in their letter. "Extending credit to students, while doing nothing to ensure that the most predatory schools are restricted from siphoning it off, offers little help to the low-income students typically preyed upon by such schools. Any increase in loan limits without significant enhancements to ... basic program integrity measures ... will lead to mass victimization of students."


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