Student debt has emerged as a major focus of the protests. Some worry that prospective students are hearing the wrong message -- while others see important shifts in the political debate about borrowing.
The Spellings commission and Senator Kennedy are right about the need for increased federal support for higher education. Achieving “a higher education system that is accessible to all qualified students in all life stages,” a Commission goal we all share, will require new and significant federal investments in both need-based grant aid and low-cost student loans.
The reasons are largely demographic. The largest secondary school classes in history are graduating over the next few years. Equally important, the growing diversity of secondary school graduates creates challenges; there are cultural and information barriers that need to be addressed.
Senator Kennedy is correct in pointing out that the federal student loan programs are the single largest source of financial aid, making them an essential component of any plan to increase the accessibility and affordability of postsecondary education.
So while America’s Student Loan Providers agrees that “every student in the nation should have the opportunity to pursue postsecondary education,” we do not believe that this shared policy goal can or should be achieved by eliminating the guaranteed loan program, as the senator suggests. This would jeopardize the fulfillment of educational goals for the millions of students and 6,000 colleges, universities and technical schools that rely on guaranteed loans.
Such a one-size-fits-all government solution wouldn’t be good for students, parents or schools. Nor is it good policy.
Indeed, it is the public-private partnership of the guaranteed loan program that will make $56 billion available to nearly 7 million students and parents this year alone.
Equally troubling is the assertion that the program is without risk to lenders and other guaranteed student loan participants and that it somehow encourages students to default on their loans. When a student is unable to repay his or her loans and goes into default, it harms the student, the lender, and the taxpayer. That’s why student loan providers have implemented innovative strategies to assist borrowers in understanding and meeting their repayment obligations, and that’s why student loan default rates today remain near the lowest level in history.
Finally, it is widely recognized that the federal methodology used to calculate program costs overstates the cost of the guaranteed loan program and understates the cost of the direct loan program. Other analyses conclude that costs of the two programs are either virtually identical or that the guaranteed loan program is less expensive. The point is that major decisions about the future of the loan program that millions of students depend on shouldn’t be based solely on questionable cost assumptions.
For 41 years, the guaranteed loan program has helped make postsecondary education possible for millions of Americans. One of the original Great Society programs, it has been hailed by Democrats and Republicans alike. It’s one reason why a 2000 Brookings Institution study called increased access to postsecondary education one of the federal government’s most significant accomplishments.
Clearly, this is one government program that is deserving of support. We welcome the opportunity to work with the Congress and administration for the benefit of those seeking educational advancement.
It is not often that one’s research topic is the lead story in the national media, but the topic of financial aid has been in the forefront of the American consciousness from San Diego (home of Student Loan Xpress) to Albany, N.Y., (home to New York Attorney General Andrew M. Cuomo) and points in between.
The stories of scandals, kickbacks, influence peddling, and fleecing -- to highlight just a few of the phrases used by politicians and reporters -- in the student loan business have dominated the headlines the last two weeks. I have chuckled at the many e-mails and comments I have received from far-flung friends and relatives who have asked, “Have you read about this student loan stuff?” That is a little like asking somebody who works in the U.S. Justice Department if they have heard about Attorney General Gonzales and the U.S. attorney firings.
We have a couple of key players to thank for much of the scrutiny. Upon taking office earlier this year, Attorney General Cuomo began investigating the relationship between higher education institutions and student loan providers. He was looking to see if colleges and universities receive benefits from the providers in order to place them on the preferred lender lists used to direct students to loan providers. And the New America Foundation, through its Higher Ed Watch blog, broke the story of three financial aid directors around the country (as well as an official in the Department of Education who oversaw lenders) receiving and subsequently selling stock in Student Loan Xpress.
Attorney General Cuomo’s investigation received a fair amount of media coverage, but the story gained real legs and moved to the front pages when the focus shifted from relationships between loan providers and universities to relationships between lenders and specific financial aid officials at the institutions. As with most scandals, it is a much better story when the media can put the name and face of a real person on it, rather than just the moniker of a multi-billion dollar higher education institution.
Stirred up by the initial disclosures by the New America Foundation regarding high-ranking financial aid officers at Columbia University, the University of Texas at Austin, and the University of Southern California, reporters around the country have uncovered other apparently untoward relationships between financial aid officials and student loan companies. At this point, until all the facts are out, I think it is fair to categorize all that has been reported as “allegations.”
But the student aid profession is very much on edge these days, with perhaps more officials out there living in fear that something they had done in the past will be discovered by the news media or Cuomo. Dallas Martin, head of the National Association of Student Financial Aid Administrators, has been on the defensive throughout the scandal and probably is rather tired of hearing the phrase “damage control.”
The initial reports of stock grants and sales have been followed by others involving Student Loan Xpress payments of tens of thousands of dollars to financial aid directors at Johns Hopkins, Widener and Capella Universities for consulting or other purposes, including the paying of tuition for one aid director to attend graduate school.
All of these officials (including the Department of Education employee) have been placed on leave by their employers while the institutions try to sort out the facts. If the allegations are proven true as they have been reported in the media, it will be a serious stain on the reputation not just of these officials and their employers but on the financial aid profession as a whole.
Regardless of whether their relationship with Student Loan Xpress influenced decisions regarding preferred lenders, or steering students toward certain loan providers, these officials (and their institutions, if aware of the relationships) should have been more cognizant of the appearance of conflict of interest. It is not enough to declare that the relationship with Student Loan Xpress did not influence any decisions they made; people will assume the worst.
From these disclosures of fees paid to financial aid officials, the attention in the last few days has shifted to the advisory boards maintained by many student loan providers. In addition to the board maintained by Student Loan Xpress, most of the larger lenders, including companies like Sallie Mae, Citibank, Wachovia, and Wells Fargo, have similar boards made up largely of financial aid officials.
While the companies say they do not pay any compensation to the board members, they do generally pay their travel expenses to attend meetings of the boards. Trying to head off any notion of these meetings as junkets, the loan companies and financial aid officers have been quick to point out that many of these meetings have been held in such less-than-exotic places as St. Paul, Minn., and airport hotels. (We can discuss whether Las Vegas and Orlando, where some of these meetings have taken place recently, fall into the less-than-exotic category).
Both the student loan companies and the financial aid officials have said that these boards are used to help advise the companies on how to best structure their loan programs to meet the needs of students. Since the financial aid officials are on the front lines of working with students, they are in the best position to recommend new programs or changes to existing loan programs that will help their students.
I have sat on numerous advisory boards, and I have firsthand knowledge of the role they can play (my disclosure is that none of these have been for student loan providers). Both the lenders and financial aid officials are correct in stating that the advisory boards provide an important role, one that ultimately can benefit students. It would be a shame if in the wake of this scandal, these boards get dismantled and the dialogue between financial aid officers and lenders is hampered or, worse, forced to go even more underground.
Given the recent allegations, I feel comfortable arguing that there should be no honoraria paid by the lenders to advisory board members. And the lenders should be cautious regarding where these board meetings are held, keeping in mind that they must not be construed as junkets by the media, policy makers, or most importantly, students and their families. Even though I believe that the great majority of financial aid officers are honest individuals who would not be swayed by receipt of a modest honorarium for their service, or through attending a meeting in a warm, inviting climate, the scrutiny under which they find themselves dictates that they have to be squeaky clean.
We should be cautious not to throw out the proverbial baby with the bath water in responding to this scandal. Yes, those officials who made what are clearly some very poor -- and perhaps, even stupid -- decisions should be held accountable for their actions. But let’s not go overboard by eliminating a valuable mechanism for financial aid officials and student loan providers to work together to improve service to students. If we do so, in the end it will be the students who suffer for it.
Donald E. Heller
Donald E. Heller is associate professor of education and senior research associate in the Center for the Study of Higher Education at The Pennsylvania State University in University Park.Â His research focuses on financial aid and college access.
Presidents and financial aid directors are the two educational leaders on campus who are directly responsible for the success of the whole student, I used to tell audiences, with more than too much bravado.
I was trying to make a point. Every administrator needs to be involved to achieve institutional success, of course. But presidents and financial aid officers deal with a big picture stakes – success or failure of the student.
If the student fails, the institution fails. The president takes the blame.
If the institution fails the student, the student loan may not be repaid. The financial aid officer is on the line.
The latest public crisis in student loans reignites a question that has always haunted me: Why do college presidents too often leave the field of public debate when it comes to the specifics of student loans?
“Unfathomable”, “administrative nightmare” and a “policy backwater” are descriptions of the lending debate that would have encouraged CEO indifference to the politics of student loans in the past.
Collectively, financial aid officers, banks, student advocates and executives of national higher education organizations have controlled the options and the course of the nation’s college financing scheme -- they were the ones with time to deal with the arcane.
Today, however, loans account for more than 30 percent of all payments for college tuition costs. Loan volume has more than doubled in a decade and is still growing. Private college loans, providing funds beyond the federal program limits, have increased by 734 percent in a decade, to $14 billion in the 2004-5 school year.
Can individual college presidents, with so much else on their plates, ignore the foundation, structure and details of the nation’s publicly financed student loan programs, and a thriving private sector alternative?
At their peril. And, at threat to the complicated, but working, system of higher education finance in America.
The latest blow-up is over lender payments to colleges and administrators who designate loan products on preferred lender lists. This is just a seasonal hurricane compared to the climate change in store for student lending over the next decade.
Essential public policy issues, emerging new private sector loan products and direct-to-the-student marketing techniques are going to change the way Americans afford to pay for college.
It can happen with or without college president resolve to assure that the interests of their students and institutions come first.
Off campus “student advocates” or “higher education policy experts” are gaming the current crisis politics to achieve long sought ideological change in these loan programs, which may or may not match a student and institutional requirements.
Among a host of issues, there are some that will directly redefine the nature and extent of student loan availability:
The future of the bank-based Federal Family Education Loan Program (FFELP) and its sibling the Ford Direct Loan Program (DLP), the latter representing about 25 percent of all federally guaranteed student lending. Advocates for government-as-lender will use the latest crisis to limit the bank program and prefer expanded borrowing from the government, not the market place. Sustainability into all economic futures is the issue here. Will the government assure colleges' access to loan-supported tuition financing under all circumstances? Student loans have become the third largest of the nation’s asset-backed securities markets -- after credit cards and mortgages. The private marketplace has made lending at these levels possible. If not the private market place, can the government swallow the growing need for student loans to pay tuition into the future? At the levels of debt that future costs will require? College presidents might want to assure continued direct access to the market place, not exclusively through policy makers who have various and sometimes conflicting agendas.
The role of state-based student financial aid agencies as the Congress and president impose a continued financial squeeze on FFELP administration costs, default prevention efforts and default collections revenues. It could mean the end to federally contracted, state-based guaranty agencies, the student financial aid agency in 27 states that are often the backbone of information and training to colleges, students and families. They are the sponsors of Internet-based, go-to-college and early career and college awareness programs. Many agencies also administer state grants and often the college savings program -- assuring local policy continuity at the state level.
Direct-to-consumer lending, bypassing the college financial aid office and making direct deals with students and parents, may end the current coordinated and guided match between grants, loans and college work -- all without assuring that low-cost, federally subsidized loans are considered before more expensive private loans.
Consolidation of lenders:Sallie Mae’s recently announced sale to two private financial services companies and two of the largest student loan banks (Bank of America and JPMorganChase) is another signal that market forces -- not public interest -- are driving the federally subsidized student loan business. While Sallie Mae holds 40 percent of total FFELP assets and services 10 million students and parents attending 5,600 colleges, new loan volume at growing value is originating not with banks, but with marketing companies that securitize their loans, selling them to American and foreign financial markets.
Time to payoff: With the boom in student loan consolidations, the time to payoff of student debt has lengthened from the nominal 10 years to 15 and 20 and 30 years, in some cases. The cost of college is exploding exponentially after graduation by extending interest-bearing loan payments so far into the future. With a possible average payback time easily approaching 15 years for most future borrowers, is it not time to look at other alternatives? British and European loan programs delay repayments further into work life. ”Student securities” plans based on percentage of earnings are being pioneered by the Robertson Educational Empowerment Foundation, allowing a match between future income and debt. These and other innovations should be explored that avoid mortgaging student futures -- drawing out loan payments and interest expense so far into their future
College presidents most often represent the aspirations of their institutions, faculty, and their clients, the students. The president may be the only policy actor to assure that student loans -- the essential, largest, and growing educational financial scheme of the 21st century -- meets the needs of both the academy and student
Student and family interests should coincided with institutional success. I think only the CEO sees that conjunction and must speak out to assure that government, lenders and the entire higher education community meets the financial needs of both colleges and students into the future.
The times are changing. And college chief executives need to reenergize the student loan debate, assuring that the outcome serves the whole student and his or her institutions.
Robert Maurer, formerly President of New York’s student aid agency, the Higher Education Services Corporation, is a writer and consultant on college financial aid and instructional technologies.
In response to New York Attorney General Andrew Cuomo’s inquiries and a spate of unseemly behavior in student lending, federal officials have quickly embraced patchwork solutions for the industry. As a consequence, they are in danger of overlooking the opportunity for a thorough reassessment of college financing.
Some of the behavior raising eyebrows is clearly troubling and inappropriate, such as incidents at Johns Hopkins University and the University of Texas of lenders and financial aid officials engaging in “payola” and in-stock dealings. Other reputed scandals, however, are more ambiguous and say more about the state of the loan sector itself than those involved in it. For instance, Nelnet has been under scrutiny for its marketing deals with university alumni associations; Sallie Mae for providing call-centers for colleges and universities and offering “opportunity loans” to students who might not otherwise qualify; and various lenders for “revenue sharing” with universities and paying for travel and lodging while courting financial aid officials.
These “scandalous” behaviors actually amount to the relationship-building and aggressive marketing one finds in any business dependent on sales. They may be uncouth or unlovely, but these activities simply reflect loan providers struggling for advantage within the murky rules of the existing market. Meanwhile, financial aid officials juggle considerations of cost, institutional need, and provider quality in a constantly changing market place. It’s no wonder that we are unhappy with the results.
We should expect private enterprises to tiptoe up to the edge of what’s permissible. Pushing boundaries is what drives the process of innovation, marketing, and cost cutting, the results of which we enjoy until we are exposed to their unseemly underbelly. If we do not like where those lines are drawn, then it is appropriate to move them.
Cuomo’s code of conduct will help on this count, but criticizing loan providers or financial aid offices for fostering associations with one another is unfair when we remember that today’s reviled “preferred lender” lists themselves were largely a response to federal direction. In the Omnibus Budget Reconciliation Act of 1990, Congress made reasonable student default rates a condition for the participation of colleges and universities in the FFEL program, thereby giving institutions incentives to prefer lenders with a record that federal officials would deem satisfactory. Compelled to favor lenders with lower default rates, colleges and universities created “preferred lender” lists, and lenders began to compete for places on them. In short, Congress’s earlier directive -- reasonable and eminently defensible -- helped foster the relationships that legislators now decry.
The Big Picture
When the Guaranteed Student Loan program was created in 1965, just 18 percent of college age students pursued college. Today, that number is over 50 percent. Federal lending has played a key role in expanding access to college, but its success has created a new world with its own challenges.
Policy makers in the 1960s and ’70s assumed that banks would be reluctant to provide the necessary funds to students who are mobile, small-dollar and risky borrowers, and thought it necessary to provide resources and incentives to ensure an adequate financing pool.
In response, Uncle Sam promised to reimburse lenders for defaulted loans, raised the statutory interest rate, provided a supplemental rate of return for lenders (called the “special allowance”), and created the Student Loan Marketing Association (known as Sallie Mae) to buy extant loans, thereby creating liquidity for new loans. Those efforts have succeeded to a degree that their early architects could scarcely have imagined. Private student lending has exploded to over $17 billion a year, equal to about 25 percent of the federal loan volume, suggesting that those early efforts and developments in credit markets have met many of their goals -- at least for serving some segments of the lending market.
In fact, the furor about the cost of college centers on the price of private schools; two-year and four-year public schools -- which enroll 80 percent of college students -- remain a remarkable bargain. While the median price tag for tuition and fees at a private four-year college is $22,000, and well over $40,000 at top-tier schools in college ranking surveys, it is less than $6,000 on average at a public four-year university. Four years of tuition and fees at a public institution average less than $25,000. In short, college is extraordinarily expensive -- for those who choose to attend extraordinarily expensive private institutions.
Contemporary discussions about student lending often fail to distinguish between two very different aims: the first is that of access, which is primarily important for low-income families; and the second is that of educational choice, which is most relevant for middle-income students weighing more expensive schools against cheaper, in-state public institutions.
Expansions in the federal loan program since the 1970s have primarily called upon taxpayers to help subsidize college choice and cash flow management for families without demonstrated need. The Middle Income Student Assistance Act (MISAA) of 1978 removed the income cap on loan eligibility, and today even students without subsidized loans still benefit from deferred interest payments and taxpayer-provided loan guarantees. In 1980, the Parental Loans for Undergraduate Students (PLUS) program began allowing parents to take out additional, separate loans under the Stafford program, with no restrictions on family income. By 2005, PLUS loans constituted 14 percent of Stafford borrowing.
Today, less than 60 percent of federal student aid is provided on the basis of need. In fact, Harvard University’s Bridget Terry Long has calculated that in 2003-4, nearly one in three dependent students from the highest income quartile took out Stafford loans and borrowed just as much on average as students from the lowest income quartile. It’s one thing to argue that taxpayers should help ensure that every child has the opportunity to attend college; it’s another thing entirely to suggest that they should subsidize the ability of students to attend any school they want.
A Forward-Looking Agenda
What does all this mean for the future of student lending?
First, and most obviously, the push for increased transparency in the industry, clear codes of conduct, and a more level playing field are all to the good. But transparency alone won’t change existing incentives -- and reactionary policy making could forfeit important opportunities.
For instance, Cuomo has expressed concern that lenders are engaging in differential treatment depending on the institution a student attends. However, should this be regarded as a problem, or an opportunity? If lenders are eager to serve some students, either because they appear to be good credit risks or because lenders are eager to cultivate banking relationships with prospects deemed likely to be high-earners in time, this may be a development worth celebrating.
As with any publicly nurtured market, the optimal course is the development of a mature, responsive and transparent private market, in which students’ needs are met, to the extent practicable, without public guarantees or funds. Obviously, given the fact that the private market will not serve all students, there remains an important role for public subsidies and loans, but that ought not blind policymakers to the fact that the contemporary loan sector can and will serve a substantial population of middle- and upper-class students without public subsidies or financing.
Second, there are few incentives for financial aid officers or guarantors, beyond benevolence, to be innovative or efficient, or to safeguard the interests of borrowers. While this model may have worked in the cloistered, paternalistic lending environment of an earlier time, recent headlines suggest the need to revisit assumptions about roles, rewards and accountability.
Third, if the federal mission is to ensure access to college rather than choice of college, better targeting of the allocation of funds is necessary. Policy makers might focus on using guarantees and subsidies to ensure access to loans for low-income students who are often higher credit risks and on establishing strong consumer protections for borrowers better served by the growing private loan industry.
Today, Washington seems to be leaning the other way. Earlier this year, in line with its Six for ’06 pledge, the Democratic majority in the House of Representatives voted to cut interest rates on student loans in half, without any effort to direct this new benefit to low-income students. Given that the 6.8 percent rate for federal Stafford loans was already highly competitive with market interest rates, such untargeted measures seem a poor use of taxpayer funds.
Fourth, we should embrace the success of earlier efforts to create liquidity and credit availability in higher education. Private loans comprised just 6 percent of the loan industry in 1996-97 but now amount to roughly 20 cents of every dollar borrowed. The $17 billion that for-profit lenders are eagerly offering to college students suggest that a vibrant credit market has been created for at least part of the college-going population. The challenge is to understand how large of a population that sector can serve and what will most effectively help the students whom lenders deem less attractive.
The emergence of private lenders and the accumulation of data on borrower performance have led to new advances in pricing models and customer service. The risk is that private lenders use aggressive marketing to entice students into debt they are unprepared to handle. On the other hand, these providers also have the potential to experiment with pricing and repayment options and otherwise pioneer loan products that may be cheaper, more convenient, and more customized than those that exist today.
Fifth, we should rethink the machinery that impedes comparison shopping and makes loan providers less sensitive to student needs and repayment ability. The need to rethink the FAFSA and move to a more user-friendly and predictable system for determining student aid has been widely recognized. Another step is to push state-funded institutions to be more transparent about the provision of student aid.
A less familiar measure would address the risk that securitization encourages originators to issue loans with little concern for a student’s ability to repay. Loan originators package and resell loans to third party companies. In purchasing these “securities,” these third parties adopt the risks associated with those loans. This process of securitization diffuses loan risk and protects loan originators from the risk of ill-advised loans; this process may, in turn, encourage originators to make loans to borrowers who are uncertain credit risks.
This sequence of events has recently played out in the subprime mortgage industry. A corrective might be new guidelines requiring the lender or school in question to adopt a credit risk position in the loan, thereby incentivizing loan originators to exercise prudent judgment when originating loans and financial aid officials to more carefully monitor the quality of the loans their students are receiving.
While attending to student need, it is also important to foster student responsibility. It is widely estimated that students who graduate from college will earn $1 million more than their peers over the course of their working lives. There is, of course, a tension between ensuring that cost considerations not deter students from attending college while asking those who reap the benefits of higher education, rather than third parties, eventually bear the costs. Precisely how to balance this tension is an open question, but—frequent caterwauling about the put-upon student aside—it is not inappropriate to ask students to accept loans that will permit them to ultimately shoulder a substantial portion of the cost of postsecondary schooling, lest opportunity be mistaken for entitlement.
Frederick M. Hess and Juliet Squire
Frederick M. Hess is director of education policy studies at the American Enterprise Institute and editor of Footing the Tuition Bill (AEI Press 2007). Juliet Squire is a research assistant at the American Enterprise Institute.