An Opportunity to Aid Borrowers

Yesterday, the U.S. House of Representatives pushed through a bill that would extend a previous effort to bail out student loan providers. Before the Senate acts on this legislation, Higher Ed Watch urges lawmakers to view this as an opportunity to come to the aid of financially distressed borrowers struggling with private loan debt.

The House legislation, H.R. 6889, would extend the expiration date of two parts of the Ensuring Continued Access to Student Loans Act (ECASLA) to July 1, 2010, a year longer than they were originally written to last. First, the measure would continue a program that allows the Secretary of Education to either buy outright or purchase participation interests in newly disbursed student loans. These programs have resulted in between $3 billion and $4 billion of loan agreements with student loan giants Sallie Mae and Nelnet, as well as several other lenders, according to various sources.

Second, the bill would also continue allowing entire schools to be eligible for assistance through the “lender of last resort” program if 80 percent or more of their students cannot find loans. While this would ensure that all students at a given institution would receive loans either through a guaranty agency or other designated lender of last resort, there are no reports that this extremely complex program has been used.

Given that this extension will affect loans for the 2009-10 school year, we find the timing of this extension curious. Many months remain before students apply for next fall’s financial aid and, as we predicted long ago, students aren’t having any problems finding loans now. To date, the Direct Loan program has accommodated institutions that wish to exit the Federal Family Education Loan (FFEL) program, lender of last resort systems have been updated, and there continue to be thousands of FFEL providers. Why act now before we know whether the assistance will really be needed?

Regardless of its timing, the extended bailout presents an opportunity for Congress to continue its efforts to ensure that students are getting the best possible deal on federal student loans and not plunging deeper into private student loan debt. There are at least three steps we believe Congress could take in these areas:

Make PLUS Loans More Attractive

First, Congress could lower the interest rate parents and graduate students pay on PLUS loans so that the terms are more favorable than those offered by private lenders. Some borrowers may be able to get better initial rates on private loans, but whether this “initial” rate holds depends on financial conditions. [Remember, most private loans carry variable interest rates that are not capped.]

We believe that PLUS loans are almost always a better option for parents and graduate students than private loans. For one, PLUS loans provide more certainty for borrowers because they carry fixed interest rates. They also have less strict credit requirements; allow a tax write-off for some borrowers; and offer more protections. For example, lenders making PLUS loans are required to offer financially struggling borrowers the option to enter deferment or forbearance, and to discharge the loans of borrowers who die or are permanently disabled — features that are optional for private lenders.

End Bankruptcy Protection

The 2005 bankruptcy bill gave private student loans the same protections in bankruptcy proceedings that are reserved for child support, taxes, and other obligations to the government (including federal student loans) by making them extremely difficult to discharge in bankruptcy. As we have said previously, we don’t see any good reason for private loans to be accorded the harshest bankruptcy status. Individuals who borrow private loans are trying to better their lives. They certainly shouldn’t be treated more harshly than those who rack up credit card debt at the mall.

Concerned that this provision is stranding borrowers with unmanageable levels of debt, some legislators have attempted to reverse the 2005 legislation and make private loans dischargeable in bankruptcy. Rep. Danny Davis (D-IL) was the latest to try, but he was unable to slip a change into the House version of legislation to reauthorize the Higher Education Act. With the current bill headed to the Senate, Congress has an opportunity to make another attempt to help heavily indebted borrowers by repealing the bankruptcy protection. This is an especially important action as households are buffeted by worsening economic conditions.

Require Private Loan Certification

As we have also noted previously, a disappointing number of borrowers turn to private loans without first exhausting their eligibility for lower-cost federal loans. This may occur because borrowers do not fully understand their options or have been confused by lender pitches that promise a “better deal” with private loans. Some institutions, such as Barnard College and Colorado State University, have found a way to close this information gap by requiring all borrowers taking out private loans to first speak with aid counselors to ensure they have exhausted their federal loan eligibility. The schools aren’t keeping students from taking on private debt; they are simply ensuring that students have all the facts before certifying a non-federal loan. The result of these efforts have been dramatic — Barnard’s private loan volume decreased by 73 percent the year after instituting the counseling requirement.

Congress could help schools enact similar programs by requiring that all private loans be certified by financial aid offices before distribution. This would give schools the opportunity to work with borrowers who are taking on unnecessary levels of debt or failing to exhaust their federal eligibility. From a research and public policy standpoint, such a change would also provide sought after statistics on the exact number of private loans disbursed and the demographic information of the borrowers taking them out — data that is impossible to get now because lenders do not have to report direct-to-consumer loans.

Whether Congress decides to implement one or all of these proposals, we hope that it recognizes that the exhaustion of enacting several higher education bills in the past year and the 800-pound gorilla of No Child Left Behind reauthorization looming on the horizon may mean that the ECASLA extension may be one of its few chances to provide meaningful assistance to student loan borrowers in the near future. Because of this, we suggest that if Congress wants to extend its bailout to lenders, the least it could do is throw a few buckets in the direction of borrowers.

UPDATE: The Senate passed the ECASLA extension bill on Wednesday without including any additional help for borrowers. The bill is now awaiting President Bush’s signature. To read more about the bill, check out our Weekly Roundup.