Paying the Price at Private Colleges

For years, expensive private colleges have pretty much been able to raise their prices without having to worry about scaring off students — as the widespread availability of easy credit made it possible for students and their families view these schools as affordable. Lenders have been all too willing to ensure that these students had all the money they needed, through the federal and private loan programs, to be able to afford to attend.

For these high-cost colleges, particularly non-elite ones that heavily rely on tuition to cover operating expenses, the lenders’ eagerness to provide high cost private loans to financially needy students at their institutions presented a win-win situation. It allowed them to free up their institutional aid dollars to recruit “more attractive” students (merit scholars, etc.). And, for the most part, the schools had the luxury of not having to worry about the difficulties many of their students would encounter repaying these loans.

But now with all the turmoil in the financial markets, and private loan default rates on the rise, these policies are coming back to bite high-priced schools. That much is clear from a survey that the National Association of Independent Colleges and Universities (NAICU) released on Tuesday. The group, which lobbies on behalf of private colleges, questioned its members about the effect the credit crunch is having on student loan availability at their institutions.

Few of the 504 colleges that responded reported having any problems associated with federal loans. Many, however, said that they had run into trouble obtaining private loans for at least some of their students. This is because most lenders are no longer willing to waive or substantially loosen their credit requirements to provide unsecured debt to high-risk students — a once commonplace practice that helped fuel the growth of private loan borrowing on these campuses.

Of the schools that responded:

• 54 percent said they had more than 10 students who were unable to secure a private loan this year.
• 11 percent said they had more than 50 students who were unable to obtain a private loan.
• 46 percent said they had some students taking the semester off or switching to part-time status because of their difficulty obtaining financing.

Meanwhile, about 18 percent of respondents said that fewer previously enrolled students returned this semester than expected, and 19 percent reported having a smaller incoming freshman class than they had expected.

While at first glance these statistics are alarming, the NAICU survey raises more questions than it answers. For instance, are the students who are not showing up simply going to less expensive schools? According to recent reports, students are increasingly considering less costly options.

Also, are private colleges responding to the credit crunch by reexamining their institutional aid policies? Specifically, are they shifting money they currently spend on merit aid to need-based financial aid so that the students who truly need the help get it?

But perhaps most vexing to us is the following question: Did private colleges really believe that the path they were on was sustainable? That they could just continue to jack up their prices and expect financially-needy students to take on more and more debt to attend?

Some college lobbyists and lenders are undoubtedly hoping to use the survey’s results to try to press lawmakers for further federal loan limit increases. We are hearing reports that lawmakers may be considering opening up the federal PLUS loan program to undergraduates – allowing them to borrow up to the full cost of attendance at their institutions. Under this proposal, students attending the most expensive private colleges would be able to borrow more than $200,000 in federal loans during their college careers.

At Higher Ed Watch, we can’t think of a more irresponsible and destructive proposal. If we should have learned anything from this credit crunch, it is the hazards of overloading debt on people who can ill afford it. Don’t forget that by definition most traditional college-age students are subprime borrowers, as they lack established credit records.

If the NAICU survey tells us anything, it’s that times have changed and that high-cost private colleges need to rethink the assumptions they have been operating under.