Seniors:
It doesn’t seem that long ago that I wrote about the lender scandal and how it affected the public and loans. Now it is a year later and although we read less in the press about the scandal, concern about the current credit crisis, difficulties on Wall Street and the looming recession have many parents of college bound students worried about how college financing is affected. Of course it doesn’t help when we read in the paper about lenders leaving the Federal Family Education Loan Program (FFELP) and the tightening of credit in response to the sub prime debacle. But what does it mean for the average person out there?
I believe that there are both long term and short term consequences to be considered which will ultimately change the landscape in terms of college finance. Although these changes will force a change in the way we do business, it isn’t a call for panic. The simple answer to many parents’ concerns about the availability of loans is that federally subsidized loans offered within the Direct Lending and FFELP Programs will continue to be available to students. These are the loans you know as Stafford, Perkins and PLUS loans. Although we’ve heard about a number of lenders leaving the market, there are over a thousand lenders - banks, origination companies, and credit unions still offering these loans. In addition, many of these companies also offer private loans, which many feel will become more expensive.
Recent changes enacted by Congress reduced the subsidies lenders were receiving. In addition, the cost of participating in the FFELP program increased and significantly impacted on the profit margins. As a result, most lenders, in particular small lenders, have not been able to remain competitive in this market because they have had to pass on to the consumer fees that at one point they covered. Because many lenders have dropped out in response, the competition is shrinking and unfortunately, we know that it is competition which keeps prices low. When that goes away, the consumer suffers. While many people point to the Direct Lending Program as a solution, they forget that it was the option of more choice in lenders, improved service and competition by reducing or offering no fees that drove many schools to leave Direct Lending and participate in FFELP. (At the present time, 80% of the colleges and universities participate in the FFELP program.) This problem is further exacerbated by threats to financing these loans caused by a “frozen” auction rate securities system. With a disruption in this process, lenders find themselves unable to sell loans and therefore cannot finance new loans. While the larger banks have the ability to carry these loans on their books while financing new loans, smaller lenders who rely on the sale of their loans have found few takers in today’s market, hence putting many companies out of business. While this largely affects the lending industry, as discussed earlier, reducing competition leaves the public with limited choice in what was once a highly competitive market.
On the private loan side, the tightening of credit caused by the failure in the sub prime market has driven underwriters to tighten credit requirements and look more closely at schools that have struggled with higher cohort default rates. This affects many technical and proprietary schools as well as some community colleges. For individuals with low credit scores or students enrolled in the aforementioned schools, obtaining private loans will be more difficult.
We have also read about the continued increase in college tuition and the number of private schools that have announced changes in their financial aid offerings including the reduction or elimination of student loans. While this is a wonderful effort on their part, the number of colleges that have been able to do so is small and impacts a small percentage of students. For most students, there is little to no relief promised at the present time, other than threats to publish a list of the highest priced schools. Interestingly, applications and enrollment in these schools have not decreased in spite of this.
I advise parents to use this time to think strategically about college, the cost of college and the debt incurred. It is clear to me that in general, college tuition is going to continue to grow. The demand for an educated, highly trained workforce that will enable the US to maintain its economic advantage is critical. Therefore, a college education is requisite for most if not all young adults. With the demand for enrollment at state public colleges/universities increasing, tuition will continue to climb in order to accommodate growing numbers of students enrolling, as well as the updating and funding of new classroom and research facilities, and attracting and hiring faculty.
To meet this cost, the public must become savvy and strategic in looking at ways to finance college. There are several approaches that one can take. First, more and more students are saving on tuition by completing the first two years of their education in community colleges. The cost of tuition is significantly lower at these schools and allows them to save on the overall cost of a Bachelors Degree. This is especially appealing to students who may need to take remedial courses in their first term before enrolling in college level, credit bearing courses.
Some students are looking at part time or full time work along with college enrollment. This enables them to “pay as they go”, thereby reducing or eliminating college debt. While there are strong financial reasons for doing this, the evidence indicates that students doing this are less likely to complete their education on time, have more problems academically and become less involved in campus life.
Many people are concerned about increasing debt that many students incur to attend undergraduate and graduate school, often extending their payments out to 20 years post graduation. The public may need to start looking at ways of either reducing the amount they borrow or looking at ways they can shorten repayment of that debt. Congress has discussed possible ways of addressing this and has promised to consider loan forgiveness and income based repayment programs.
The one factor we are all faced with is how quickly the economic landscape can change and how it impacts on our daily lives. It also affects our decision making and is at the core of our values. In the coming months with a recession looming and fear that many of us can no longer take for granted the jobs or investment returns we enjoyed over the past years, we will all have to make tough decisions. The decision to go to college is an easy one; the way to pay for it will remain an uncertainty.
