Lenders'-Eye View of the Credit Crisis

July 7, 2008

Given the goings-on of the past few months, it only makes sense that the National Association of Student Financial Aid Administrators kicked off its annual meeting in Orlando Sunday with a discussion of the student loan credit crunch that has shaken the financial aid industry of late.

But some of those attending the NASFAA annual conference may have been surprised -- and dismayed -- that all but one of those asked to speak about the state of the market represented student loan providers, the lone exception being an offical from the U.S. Department of Education. No student aid officials at colleges that might be affected -- NASFAA's core audience -- and no one to speak on behalf of students, despite statements throughout the discussion that the student loan program is "all about the students."

Perhaps not surprisingly, the perspective offered by the panelists -- who represented banks, nonprofit lenders and guarantee agencies -- was a relatively bleak one. All of them thanked Congress and the Education Department for acting quickly in recent months to pass and carry out legislation to blunt the impact of the credit crunch and restore stability to the student loan market, in the form of the Ensuring Continued Access to Student Loans Act (H.R. 5715), and said they believed those moves were likely to ensure students' access to federal loans, at least in the short term.

But they also said (without challenge, except from one member of the audience, Leo Kornfeld, who helped build the direct student loan program during the Clinton administration) that Congress had helped to cause the current crisis by cutting too deeply into lender subsidies in budget reconciliation bills in 2006 and 2007, and that those and other moves by Congress had "fundamentally" and irrevocably altered the guaranteed student loan program, as John Dean, special counsel to the Consumer Bankers Association and one of the panelists, put it. Those points of view might not have been unanimously shared by a more representative panel.

"I don't know if you've been to the exhibit hall yet, but there are a lot fewer vendors," Dean said, referring to the 119 student loan companies that have decided not to make federal loans in 2008-9 because they do not see it as profitable enough for them. Taking full advantage of his setting in the land of theme parks, Dean said that "much as we'd like to have Mickey Mouse wave his magic wand" and restore the vitality of the loan program, the clock can't be turned back.

Dean and the other members of the panel, Brett Lief of the National Council of Higher Education Loan Programs, which represents student loan guarantee agencies, and Kathleen Smith, president of the Education Finance Council, an association of nonprofit and state lenders, all suggested that Congress rethink the cuts to lenders in some form or another.

(Dean won a hearty round of applause when he noted that one of the 119 lenders that has left the program was MyRichUncle, a lender whose scorched-earth policy criticizing the behavior of lenders and student aid officers -- encouraging the intense federal and state scrutiny of questionable ties between the two -- made it Public Enemy No. 1 for both groups. "I sincerely regret the departure of 118 of those lenders" from the loan program, Dean said to cheers.)

Without any advocates for students or other more skeptical voices on the panel, it fell to Philip R. Day, NASFAA's new president and former chancellor of the City College of San Francisco, to question just how significantly lenders were being affected. Day himself has been criticized in some quarters for being too quick to push for help for lenders in the months since he took the helm at NASFAA, feeding questions that were raised in the wake of last year's investigation by New York Attorney General Andrew Cuomo about the association's perceived coziness with banks and other loan providers.

At Sunday's opening forum, though, Day was the closest thing to a critical voice. "Why are we seeing lenders bail out" of the loan program just because their profits have shrunk? Day asked Dean and the others. "Why wouldn't they try to hang in there?" Not only have scores dropped out of the program, Day noted, but others have alerted aid administrators at some colleges -- particularly for-profit institutions, community colleges, and other colleges that tend to enroll lower-income (and therefore higher risk) students -- that they will not be providing loans to their students.

"We don't shut down our doors and deny students access" just because times get tough, Day said. Underlying his questioning were complaints from some financial aid directors that loan companies have long profited from their associations with colleges, but that some were now jumping ship when those profits began to dry up.

"In past years, the student loan business has been an attractive one for lenders, though it has never been quite as attractive as some would have you believe," Dean responded. He agreed that it was "frustrating" that lenders were making decisions to deny loans to students at some institutions, but for some, that is the only way that they can "hang in there the best they can."

Congress, Dean said, has "made a mistake in seeing the student loan industry as a bottomless well" from which subsidies can be cut without any price.

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