The Washington Post Gets the Story Wrong

At a time when an irrational panic appears to have swept over financial markets, everyone needs to act responsibly and make sure not to unnecessarily raise people’s fears and promote bad public policy. The stakes are too high for opportunism or sensationalism. Unfortunately, when it comes to reporting the effect of the credit crunch on student loans, some in the media are being misled and unwittingly causing widespread panic that college loan funds are drying up. They’re not.

Take, for example, The Washington Post’s recent front page story, “Credit Crisis May Make College Loans More Costly: Some Firms Stop Lending to Students.” The article begins with an ominous lede: “Many college students across the nation will begin to see higher costs for loans this spring, while others will be turned away by banks altogether as the credit crisis roiling the U.S. economy spreads into yet another sector.” It wouldn’t surprise us if some high school seniors in the DC metropolitan area, who are on the bubble about applying to college this year, read that front page lede and thought for at least a moment, “why bother?”

To be fair, the Post article was actually an improvement over even more sensational newspaper articles and television reports that have run in recent weeks. The authors of the Post story, at least, try to make a distinction between how federal and private student loans will be affected by the credit crunch. In its fourth paragraph, the article notes that the only students who appear to be in danger of being turned away by banks are high-risk borrowers seeking high-cost private student loans.

Still, the article gives the misleading impression that students across the board are going to see their loan costs soar. And at least in the case of federal loan borrowers, this just isn’t true. In fact, millions of students are expected to see their loan costs decrease this coming year because of legislation Congress passed in the fall that will reduce the interest rate on federally-subsidized loans for undergraduates from 6.8 to 6.0 percent. It drops all the way to 3.4 percent over the succeeding four years. The pending interest rate cut, which Congress included as part of the College Cost Reduction and Access Act of 2007, is never mentioned in the story. That seems like a pretty major oversight to us.

To back up its point about rising loan costs, the article’s 2nd paragraph says that federal loan borrowers “could be required to pay higher fees to borrow money, according to university finance directors and lenders.” Presumably the story is referring to the fact some lenders have reduced upfront and backend benefits they provide to students under the Federal Family Education Loan (FFEL) program as a result of the cuts Congress made to lender subsidies as part of the College Cost Reduction and Access Act. But the story fails to mention that only a small percentage of students ever received those back-end benefits. And while some students may have to pay slightly higher origination fees, many more will benefit from the interest rate cut and from other benefits that Congress included in the legislation — such as a major boost in the maximum Pell Grant award, increased loan forgiveness for those who work in public service, and a decreased financial aid penalty associated with student work and savings. None of these new benefits were mentioned in the Post article.

And the fact that JP Morgan Chase, one of the top lenders in FFEL program, has announced that it is voluntarily cutting interest rates and fees on its federal and private student loans doesn’t appear until the 24th paragraph of the story.

In taking the sensational approach, the Post buried more measured voices. For example, Larry Warder, the Acting Chief of the U.S. Department of Education’s Office of Federal Student Aid, says in the story that the Department hasn’t detected any major problems with student-loan availability. “I’m afraid people are panicking with no reason to.” Unfortunately, we don’t hear from Warder until the last third of the article.

Here are some other problems with the story:

• The Post presents two potential victims of the credit crunch — a graduate student with $50,000 in loans for one year of education who is “anxious about rising rates” and fears that he will have to sell his “soul to an oil company” to repay them; and a recent graduate from Northern Illinois University who has a $15,000 private loan with a variable interest rate that “has already hit 8.7 percent” and is worried she’ll have trouble making payments at her low-wage public interest job. But the story doesn’t provide any concrete evidence that the pre-2008 loans of these students have been affected by credit market turmoil affecting some new private loans. In fact, independent of the credit market, the concerns these two students express are common to borrowers with uncapped, variable rate private loans who are interested in pursuing public interest careers. These borrowers would probably express the exact same fears even in the absence of a credit crunch. The student, for example, with $50,000 in student loans is more apt to sell his soul to an oil company because he borrowed $50,000 for one year of graduate school than because there may be a percentage point increase in his student loan interest rate. (Our colleague Kevin Carey at Education Sector made a similar point in his recent critique of the Post article.)

• The article states that “at community and for-profit colleges, some students may be denied private loans entirely.” It’s true that some students with bad credit and poor academic histories seeking to attend expensive, for-profit colleges with terrible track records are in danger of losing access to private loans. Other for-profit chains have gone out of their way to assure nervous investors that the credit crunch has had little to no impact on students attending their institutions. The Post doesn’t mention that. Meanwhile, we have not heard of any loan companies refusing to make private loans to community college students. Although keep in mind, which the Post also didn’t note, only a tiny fraction of community college students – about 1.4 percent — take out private loans in the first place.

• The article notes that Georgetown University “has devised an emergency plan” to join the federal direct student loan program in case more lenders “close shop.” The article appears to imply that direct lending, in which the Education Department provides loans directly to students through their colleges, is somehow inferior to the FFEL program. In fact, more than 1,000 colleges currently participate in direct lending because they believe that it’s a superior option for their students and schools, and for society as a whole because it’s less costly for the government to run than the FFEL program. While some FFEL program lenders offer more generous upfront benefits to borrowers than the Department of Education is able to provide, direct lending offers borrowers more generous repayment options. For example, the new loan forgiveness program for those who pursue careers in the public service is available only to Direct Loan borrowers.

Everyone needs to become much more responsible in discussing the credit crunch’s impact on student loans. There is a danger that families, nevermind policymakers, are being frightened into thinking that college loans are not available, and that therefore, they shouldn’t even bother to apply to college. Nothing could be further from the truth.

As we’ve said many times, even during this time of market uncertainty, federal student loans — as much as $46,000 to some undergraduate borrowers — are guaranteed to be universally available irrespective of a family’s credit history. The loan industry and the for-profit college industry want a bail out. But there is no federal loan crisis for students. Policymakers and the media should take heed.