Higher Ed Roundup: Week of February 9 – February 13

Stimulus Agreement Reached That Will Benefit Students and Colleges

More Help on the Way for Private Loan Providers

MyRichUncle Declares Bankruptcy

Stimulus Agreement Reached That Will Benefit Students and Colleges

Lawmakers in the U.S. House of Representatives and the Senate reached an agreement on a $789 billion stimulus bill that would boost spending on student aid for the next two years and provide help to states maintain spending on higher education despite the fiscal crisis. Final votes on the bill in both the House and the Senate could occur as early as today.

The legislation includes more than $17 billion in additional spending on Pell Grants, with increases in both discretionary appropriations and a separate mandatory funding stream created by the College Cost Reduction and Access Act of 2007. Democratic Congressional leaders said these increases would raise the maximum Pell Grant to $5,350, from $4,731, for the 2009-10 academic year.

The measure would also spend about $13 billion to temporarily replace the Hope higher education tax credit with a partially refundable $2,500 per-year tuition tax break. Like the original House bill, students who come from families that do not earn enough to pay taxes would be eligible for 40 percent, or $1,000, of the credit for each of the next two years. For the first time, students would be able to count the amount they spend on textbooks toward the benefit. Currently, the Hope credit can’t be used for higher education expenses beyond tuition and fees. In addition, the measure would boost spending on the Federal Work Study program by $200 million, as the House initially proposed.

To the disappointment of high-priced private colleges, for-profit trade schools, and lenders, the legislation would not increase federal student loan limits, as the original House bill did. It also doesn’t appear to include a key change that the student loan industry has been lobbying for – a retroactive shift to the index used to determine the quarterly interest rate subsidy paid to lenders on federal student loans.

The measure would also provide $54 billion for a State Fiscal Stabilization Fund, more than 80 percent of which would be used to maintain state elementary, secondary, and postsecondary education funding over the next three years (although the Secretary of Education can waive this requirement for states facing severe financial difficulties). Most of the rest of the money for states would be used for “critical services,” which can include education. Money from this part could be used for higher education renovations, including at private colleges. The measure specifically forbids state officials from discriminating against any type of higher education institution when allotting these funds.

More Help on the Way for Private Loan Providers

U.S. Treasury Secretary Timothy Geithner announced on Tuesday that he planned to expand to up to $1 trillion, from $200 billion, the amount that the federal government will lend to investors holding securities backed by private student loans and other forms of consumer credit, such as auto loans and credit card debt. The plan, originally proposed by former Treasury Secretary Henry Paulson, is aimed at reviving the credit markets to help provide capital and liquidity to lenders so that they will continue offering consumer loans, including high-cost private student loans.

Few details of the plan were available, so it remains unclear how much help this would private loan providers. It’s also unclear whether the Obama administration is considering offering any relief to financially distressed private loan borrowers. To that end, 19 groups representing students, consumers, and some colleges sent a letter to Geithner this week asking him to offer aid to only those private loan companies that agree to improve the terms and conditions of the loans they offer. Lenders would also have to offer loan modifications and work outs to financially strapped borrowers with unmanageable debt loads. In addition, loan providers would be required to discharge the loans of borrowers who die or become permanently disabled.

“A bailout for the providers of usurious private student loans will not solve the college affordability crisis caused by the failing economy,” the letter, which was spearheaded by the Project on Student Debt, stated. “However, if a form of rescue is provided for private student loans, it would be unconscionable to do so without also providing better consumer protections.” [Disclosure: Higher Ed Watch is supported in part by Institute for College Access and Success, the sponsor of the Project on Student Debt.]

MyRichUncle Declares Bankruptcy

MyRichUncle (MRU), the direct-to-consumer student loan provider that played a pivotal role in exposing conflicts of interest between college financial aid administrators and lenders, is the latest victim of the credit crunch. The company announced on Monday that it had “suspended all business operations” and filed Chapter 7 bankruptcy. According to Student Lending Analytics, a blog that provides in-depth coverage of the private student loan industry, MRU disbursed about $230 million in private loans in 2007, representing about 1.3 percent of the entire market. In a recent SEC filing, the company revealed that delinquencies on its private loan portfolio were higher than had been anticipated.

In the summer of 2006, MRU ignited a firestorm of controversy when it began running two-page advertisements in national newspapers, including USA Today and The New York Times, accusing college aid administrators of taking “kickbacks” and “payola” from the loan companies they were recommending to their students. These allegations helped spur New York Attorney General Andrew Cuomo’s investigation into the “pay-for-play” student loan scandal.