Nov. 19, 2008
The National Association of Student Financial Aid Administrators (NASFAA) is at it again -- raising panic levels to pressure policymakers to provide a massive bailout of the student loan industry. This time, the group's focus is on ensuring that lenders and colleges can continue to offer expensive private loans to high-risk borrowers.
On Monday, NASFAA President and CEO Phillip Day (pictured) sent a letter to both Treasury Secretary Henry Paulson and Education Secretary Margaret Spellings asking for their assurances that they will use a portion of the $700 billion bailout package to provide liquidity to companies that make private student loans. Praising the efforts Congress and the Bush administration have made to assist lenders that participate in the Federal Family Education Loan (FFEL) program, Day urged Paulson and Spellings to take "similar effective actions to ensure credit financing is available for those private educational loan borrowers that need it in order to pay postsecondary education expenses."
"Surely," he continued, "private education loans must be considered ‘troubled loan assets' and action is needed to correct this marketplace dysfunction." [The bailout package Congress approved in October gives the Treasury Secretary the authority to purchase "troubled assets."]
We agree with Day that private student loans are troubled loan assets -- for many of the financially needy borrowers who take them out. As we've written repeatedly, private loans are the most toxic form of student debt available with their high variable interest rates and lack of basic consumer protections. As with subprime mortgages, the lowest income borrowers are often stuck with the highest rates and the worst terms on these loans. And borrowers who have difficulty repaying the loans often have no way out - as private student loan providers have been uniformly inflexible in offering repayment relief. In addition, federal law makes it extremely difficult for financially distressed borrowers to discharge private loans in bankruptcy.
None of this seems to trouble Day. Instead, his sole concern is that the flow of private loans continues unabated. "Without government intervention and correction of this aberration, countless students will be denied the financing they need to reach their higher education goals," he wrote.
Day, however, is grossly exaggerating. For one thing, only about 8 percent of last year's college graduates held private loans, according to the Project on Student Debt. The vast majority of students who take out loans to pay for college get them through the federal loan programs.
Undergraduates who take out private loans tend to be concentrated at high-priced private colleges and for-profit trade schools. Now Day is correct in noting that lenders are imposing stricter credit requirements on students and are requiring students with less-than-stellar credit to have their parents co-sign the loans. But is this really a bad thing? For too long, schools and lenders engaged in sweetheart deals that made it too easy for them too load up students with excessive amounts of debt. Is it any wonder that delinquencies and defaults on these loans are growing dramatically?
Rather than lobbying administration officials to reinstate a potentially dangerous debt instrument, NASFAA and its members would better serve students by redoubling their efforts to make sure borrowers exhaust the still widely available federal loans. There is substantial evidence that many students and families fail to exhaust their federal loan options (including the still widely available Stafford loans and PLUS loans, which cover up to cost of attendance) before turning to more expensive private loans. For example, they could urge members to do what Colorado State University and Barnard College did -- require conversations with borrowers before certifying private loans. These programs led to significant decreases in private loan borrowing at both schools, as students became aware of their federal loan options. This was even true at Barnard where the complete cost of attendance is over $50,000.
NASFAA members could also reexamine their own institutional aid policies to make sure that their precious dollars aren't going to "merit aid," but are instead helping needy students. That would ensure that students who can ill afford private loans won't be forced to take them out so that their schools can recruit wealthier students.
Either way, it's extremely unfortunate that NASFAA isn't focusing its efforts on trying to reduce students' reliance on private loans. Instead, the group seems only too willing to help the lending companies continue to heap this high-cost debt on students.