https://www.bloomberg.com/apps/news?pid= ... refer=homeStudents Lose Billions as Colleges Petition for Loan
April 24 (Bloomberg) -- Students in the U.S. have lost access to more than $6.7 billion a year in education loans after private lenders fled the market, spurring schools including Pennsylvania State University and Northeastern University to turn to the Education Department's Direct Loan Program.
Dozens of lenders, led by College Loan Corp. and CIT Group Inc., stopped making federally guaranteed loans because the U.S. cut subsidies and investors hurt by the subprime-mortgage crisis shunned bonds backed by student loans. At least 178 schools have applied since Feb. 28 to let students borrow from the direct program, compared with 80 that applied for the program in all of last year.
Students took out about $68.2 billion in new U.S.-backed loans this academic year, according to Mark Kantrowitz, the publisher of FinAid.org, a scholarship and loan information Web site. The borrowing is projected to rise by almost $4 billion for the next school year as both the student population and costs increase, he said. More schools say they are seeking access to U.S. direct loans as private lenders drop out.
``Certainly, having students have secure access to funds is of the utmost importance,'' said Anthony Irwin, the director of financial-aid services at Northeastern, in Boston. The school will switch to the U.S. program after two private lenders that served its students stopped making federally backed loans.
The U.S. Education Department supports legislation allowing the federal government to buy student loans of banks and other private companies to ensure funds are available for further lending, Lawrence Warder, the acting chief operating officer of federal student aid, said yesterday.
June Target Date
The legislation, passed by the House of Representatives on April 17, needs to be on the president's desk by June 1 to help students in next school year, he said. Warder also said the direct-loan program is preparing to double its volume.
Colleges' shift to direct loans means that students won't get discounts that banks and other lenders offered until recently. Those incentives included waivers of fees, which amounted to 2.5 to 4 percent of the borrowed amount, or a percentage-point reduction in the interest rate after three years of on-time payments, FinAid's Kantrowitz said. Lenders that remain in the market have reduced or eliminated those discounts, he said.
Democrats, including presidential aspirants Senator Barack Obama of Illinois and Senator Hillary Clinton of New York, say the 15-year-old direct-loan program is less costly to the government because it avoids the subsidies. Republicans say private companies provide better service.
Exodus From Program
The Federal Family Education Loan Program, or FFELP, requires lenders to cap annual interest rates at 6.8 percent for the most-common type of loan and guarantees that the government will reimburse them for any defaults. The exodus from the program so far is equivalent to 13.6 percent of FFELP loans in the fiscal year that ended in September 2006, Kantrowitz said.
The effects on the $400 billion loan market will start to appear in coming weeks, as families start seeking loans for the academic year starting in September. Loan originations typically peak in the third calendar quarter. No qualified applicants have failed to find loans, according to schools and government officials.
The influx to direct lending reverses a decade-long trend of schools' opting to deal with banks and other lenders, led by Reston, Virginia-based SLM Corp., known as Sallie Mae.
The government has projected that direct-lending volume, excluding consolidations, will total $13.6 billion in the academic year ending in June, according to Kantrowitz.
Decreased Share
Direct lending, now with about 1,000 participating schools, grew rapidly after going into full operation in 1993, capturing by 1997 about a third of the federal-loan market from private lenders. Its share decreased to 19 percent in 2007 and the number of schools dropped 18 percent as private lenders offered borrowers incentives, such as waiving fees or giving lower interest rates.
``The plain and simple fact is, for the borrower and the schools, the private program has worked better,'' said Joe Belew, the president of the Consumer Bankers Association, a trade group based in Arlington, Virginia. ``You had universities and colleges vote with their feet by trying the direct program, and they left it in droves.''
Lenders say Congress cut the default guarantee, the interest rates that private FFELP lenders will be able to charge in the future, and subsidies, making the loans less profitable. Meanwhile, the meltdown in the credit markets cut off capital for Sallie Mae and other lenders. Issuance of securities backed by student loans dropped 65 percent during this year's first quarter, according to UBS Securities LLC in New York.
Lack of Assurances
Officials at Penn State, in University Park, say they were surprised when the Pennsylvania Higher Education Assistance Agency said in late February it would no longer make federal loans. That move affected 90 percent of the 45,000 Penn State students who receive such financing.
Penn State, whose students borrowed $411.3 million in private government-guaranteed loans in 2006, considered finding other companies to recommend as lenders.
``What assurances would we have?'' said Anna Griswold, Penn State's assistant vice president for undergraduate education. ``Could we find lenders that we think are in it for the long haul? Nobody knows what's going to happen.'' As a result of the uncertainty, the school has turned to the direct-lending program, she said.
Clinton and Obama have said they want to completely replace the guaranteed private loans with direct lending.
Eliminating Middlemen
``We're going to go back toward direct lending and cut out the middlemen who charge so much,'' Clinton said at a rally last week in Pennsylvania.
Some Republicans still say direct U.S. lending should be ended.
``When markets run into difficulty, it shouldn't be used as an excuse to say, `Let's have the government do it,''' said Representative Peter Hoekstra, a Michigan Republican on the House Education and Labor Committee.