Missing Those Sweetheart Deals

At Higher Ed Watch, we have focused recently on deals that chains of publicly-traded, for-profit trade schools have made with loan providers like Sallie Mae that have allowed them to push low- and moderate-income students to take out high cost, subprime private loans. But for-profit colleges are not the only higher-education institutions that have forged these kinds of arrangements and put students in harm’s way. Many expensive non-profit private colleges have come to rely on these arrangements as essential tools in carrying out their enrollment management plans.

And now with the credit crunch, as well as a federal crackdown on sweetheart deals between lenders and colleges, many private college leaders are anxious that the easy access they’ve had to the private loan market is starting to dry up.

That much is clear from the results of a recent survey conducted by he National Association of Independent Colleges and Universities (NAICU), which lobbies on behalf of private nonprofit colleges, to determine the effect that the credit crunch is having at its member institutions. Despite some alarmist rhetoric in the news release accompanying the report “about reductions in student loan availability,” the survey confirms what we’ve been saying — that there is absolutely no federal student loan crisis. Of the 315 private colleges that responded to the survey, not a single school reported having any trouble obtaining federal loans for their students.

The colleges’ chief concern, in fact, revolves around lenders “imposing stricter credit requirements on students” seeking private student loans to attend their institutions. Nearly half of the colleges that responded to the survey complained that lenders have been “increasing the qualifying credit scores” for private loans, and requiring students with less-than-stellar credit to have their parents co-sign the loans.

These sound like pretty reasonable changes at a time when loan providers are experiencing a rapid rise in the default and delinquency rates on the subprime private loans they’ve lent, many of which arguably should never have been made.

And these moves by lenders will actually protect financially needy students. Let’s not forget that we’re talking about high-interest private loans with variable rates, which are not capped, and that lack many of the repayment protections built into federal loans. In addition, unlike virtually all other forms of financial aid, students with the greatest financial need get stuck paying the highest rates and fees on their private student loan debt.

But that’s not how most private college officials who responded to the survey seem to see it. Instead, they are wringing their hands over these developments. “In the past, students had access to a credit-ready private loan program (no cosigner required, zero credit is considered good credit),” one private college official was quoted in the report as saying. “Knowing the number of students who utilize this loan, we think that may create an access problem with the possible elimination of this private loan program.”

Another college official’s response was terser. “Required FICO score has been increased,” that official stated. “Fewer loans to at-risk clients will be made.”

The truth is that many private colleges, through their cozy relationships with lenders, have made it too easy for “at-risk students” with “zero credit” or even bad credit to take on expensive private loans. In fact, many of the institutions have included the loans in the financial-aid packages they offer to students to meet their financial need. As we have said before, this is a worrisome practice because it gives students the misleading impression that they are obligated to take out these loans. It also gives them the impression that these loans have the colleges’ imprimatur — and therefore must have pretty reasonable terms, which they seldom do. Worse yet, some lenders have encouraged colleges to brand the loans with their institutions’ names — which only adds to the confusion.

But why is packaging private loans so important to these schools? Just ask their enrollment managers. In the ultra-competitive world of college admissions, high-priced schools believe that it is absolutely essential for them to show students and their parents that they will be able to afford to attend. This is not much of a problem for elite colleges that are wealthy enough to meet the full financial need of their students. But less affluent private colleges, with smaller financial aid budgets, have turned to private loans to fill the financing gap. “It has become a necessity for private colleges and some pricier publics to have some kind of private loan available,” Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, told The Chronicle of Higher Education in 2006. “If they don’t have something handy, they will find themselves at a significant disadvantage.”

The tricky part for colleges has been that many financially needy students wouldn’t ordinarily qualify for private loans because they have no credit histories or have bad credit. So to assure that students obtain the financing, colleges have entered into deals with lenders in which the loan providers have agreed to waive or at least loosen their credit criteria in return for becoming a major lender, or even the exclusive lender, of federal and private loans on their campuses. The pay off has been that colleges have been able to include the loans in students’ aid packages, without having to worry whether the students’ loan applications would be rejected.

The sad thing is that private colleges have become so reliant on these arrangements, that they now seem, with the demise of these deals, to be at a loss as to how to help their students. According to the NAICU survey, nearly half of respondents had “no plan” in place to help financially-needy students if private loans become unavailable.

At Higher Ed Watch, we have some ideas. As we have previously suggested, instead of pushing students to take out private loans, colleges should encourage them to have their parents apply for a federally guaranteed PLUS Loans. PLUS loans are available in amounts up to the total cost of attendance for a student. Moreover, interest rates on these loans are fixed at 7.9 percent for the parents of students at colleges in the Direct Loan program, and 8.5 percent for those in the Federal Family Education Loan (FFEL) program. These rates are better than most offered on private loans. And for those students whose parents get turned down for a PLUS loan because of bad credit, loan limits on federal student loans double to $46,000 in the aggregate.

Private colleges could also consider shifting money they currently spend on merit aid to need-based financial aid so that the students who truly need the help get it. And colleges could make a real effort to curb their tuition increases — or, gasp, even reduce their prices — so that students have less need to take out private loans in the first place.

These all sound like good ideas to us. But of course, we do not have to answer to enrollment managers.