Some Student Lenders See New Opportunity In Federal Loans

New legislation aimed at bringing portions of the federal government's student-loan program back under Uncle Sam's top hat is presenting a growth opportunity for the largest lenders, while smaller players may see only the exit sign.

In March, the government said it would move federal student-loan originations--a $72.7 billion business--in-house starting this summer, eliminating billions of subsidy dollars for companies that had been originating the loans on its behalf. Unable to book fees on new loans, many small lenders whose only business was federal lending see the legislation as a big blog.

Bedfellows on Student Loans

The proposal, a version of which was incorporated into parallel legislation that the House of Representatives passed last fall, is designed to assure that borrowers turn to more-expensive (and riskier) private student loans only after they've exhausted federal, state, and institutional grants, or at least less costly federal student loans.

"Requiring school certification that confirms students’ attendance and loan eligibility -- as is currently required on all federal student loans -- discourages unnecessary borrowing which could lead to delinquency and default during repayment," the groups say in the letter. "It also gives financial aid administrators an additional opportunity to counsel students about less expensive forms of financial aid and ensures that students do not inadvertently disqualify themselves for less costly aid. Simply put, school certification will help ensure that private loan borrowers maximize their ability to borrow federal loans and only turn to private loans after exhausting federal loan eligibility."

The letter was signed by Consumer Bankers Association, the Education Finance Council, and the National Council of Higher Education Loan Programs; the National Association of Student Financial Aid Administrators; and the Institute for College Access & Success and the U.S. Public Interest Research Groups.

It is not unheard of for banks and other lenders to be on the same side of issues as financial aid officers or advocates for students; a roughly similar coalition developed around the federal government's 2007 creation of a repayment system based on borrowers' post-graduation income, for instance.

Loan changes for new graduates

Graduates don't have to fear being handed a bill with their diploma; most federal loans come with a six-month grace period.

But interest continues accruing during that time, so the sooner repayment starts the better.

The exception is with subsidized federal loans, in which the government waives interest charges until the loan comes due.

The standard payment option spans 10 years, but there's no penalty for paying off debt earlier. Of course, that's probably not an issue for those carrying huge debt loads.

Those pursuing fields that don't pay a lot will want to look into a program for income-based repayment, or IBR. The option was introduced last summer to help make debt more manageable.

Essentially, it caps payments at 15 percent above any earnings beyond about $16,000. Any debt remaining after 25 years is forgiven.

Eligibility depends on a formula that weighs education loan debt against income. A calculator at IBRInfo.org can help determine whether borrowers qualify.

Those in both the direct and Federal Family Education Loan programs can apply.

A new law that overhauled the federal lending program makes IBR even more favorable, in part by capping payments at 10 percent of income. But the changes don't go into effect until 2014 and will apply only to new borrowers.

Financial aid stories

Krista Olson, a 35-year-old mother of two, lost three jobs within the span of a year before she decided to enroll at Riverland Community College and study accounting.

Now, she's taking courses through Bemidji State University. She had help from a federal Pell Grant.

"Everything about my life has changed," said Olson.

Olson was in the library at the college Friday morning, sharing her story with a few other Riverland students and officials and 1st District Rep. Tim Walz, who came to the college to talk about recent changes to federal financial aid programs. The health care bill that President Obama signed this spring means 100 percent of the student aid funding from the direct loan program will come directly from the federal government, eliminating banks and private lenders. The Congressional Budget Office estimates the change will help save $61 billion over 10 years.

The maximum amount of the Pell Grant will increase and income-based repayment will go into effect in 2014.

Walz said he wanted to visit Riverland because it has seen 13 percent growth, many of them older than traditional college-age students.

Need more college aid? Negotiate

"I routinely advise my students, 'Ask politely for more,' " said Bruce Hammond, co-author of The Fiske Guide to Getting Into the Right College. "The recession may have made institutions a little more likely to deal."

Nationally, the average list price of tuition and fees is $26,273 at private colleges and $7,020 for in-state students at public universities, according to the College Board -- up 4.4 percent and 6.5 percent respectively from a year ago.

A sizable amount of financial assistance is available. Grants and tax benefits total an average of $14,400 per student at private universities and $5,400 at public schools. Once you add in room and board, it's easy to run up a tab of $100,000 or more over four years.

Coupled with a tough economy, it's no wonder more families are applying for financial aid than ever before. Applications for federal student aid rose 21 percent to 6.6 million in last year's first quarter, the peak period for applications. Applications from Illinois students are on a record pace this year.

Here are some tips that could sweeten a college aid offer:

UNDERSTAND THE PROCESS. Before you ask for more money, do your homework about how the aid process works and whether there's an appeals process in place. If you aren't working with a college consultant, read college planning books, go to sites such as Finaid .org or CollegeBoard.com, or simply Google "appeal financial aid" and you'll find plenty of information and advice.

Student loan overhaul to ease access, repayment

More needy college students will have access to bigger Pell Grants, and future borrowers of government loans will have an easier time repaying them, under a vast overhaul of higher education aid headed to President Barack Obama's desk.

The measure would force private commercial banks out of the federal student loan market, cutting off billions of dollars in profits for the institutions. Students will take out their loans through their college's financial aid office, instead of using a private bank.

The banks would no longer get fees for acting as middlemen in federal student loans. The government would use the savings to boost Pell Grants and make it easier for some workers to repay their student loans. In addition, some borrowers could see lower interest rates and higher approval rates on student loans.

Since the bank-based loan program began in 1965, commercial banks such as Sallie Mae and Nelnet have received guaranteed federal subsidies to loan money to students, with the government assuming nearly all the risk. Democrats have long denounced the program, saying it fattened the bottom line for banks at the expense of students and taxpayers.

The revamping of student loan programs was included in the final health care package passed by Congress on Thursday. The House approved the bill by a vote of 220-207, hours after the Senate passed it by a vote of 56-43. No Republicans in either chamber voted for the bill.

The legislation, an Obama domestic priority that was overshadowed by the health care issue, has widespread reach. About 8.5 million students are going to college with the help of Pell Grants.

Congressional allies of the student loan industry attacked the overhaul as an over-reaching government takeover that will kill banking jobs. The legislation substitutes an expanded direct-lending program by the government for the bank-based program, directing $36 billion over 10 years to Pell grants, for students from low-income families.

Colleges respond to Gov. Nixon's proposal to cut student aid

Speaking at the Springfield Business Development Corp. annual meeting, the governor outlined some budget cuts the state must make to begin to plug an estimated $500 million hole in next year’s budget.

Gov. Nixon may partially plug that gap by diverting financial assistance to students at private institutions – a move students and administrators at the state’s independent colleges and universities — including four Baptist institutions — have decided to fight.

Missouri is reportedly the first state to consider cutting off aid to private school students.

A public letter-writing campaign and telephone bank drew almost 600 students, several faculty and staff, and a few parents at Missouri Baptist University’s St. Louis campus March 22. The turnout also caught the attention of most of the area’s media, including the Associated Press.

In his Springfield speech, the state’s top politician pointed to “vital” services that cannot be cut, such as the Highway Patrol and public school teachers.

Cuts, then, must come from nonessential services, including funding that gives students more college choices, he said.

“We also need to make changes in another well-intentioned area: financial aid for higher education,” Nixon told the Springfield business community. “Currently, many of our state college scholarship programs — both for merit and for need — provide financial support to students whether they choose to attend public or private colleges. In some cases, students at private schools actually get larger scholarships than students at public institutions.

Will the student aid bill help with your college costs?

Here’s a rundown of key components in the legislation:

• Bigger grants. Maximum federal Pell Grants for low- and middle-income students would increase to $5,550 in 2010 and $5,975 in 2017. Also, the grants would be tied to the cost of living from 2013 to 2017 – rising at the same rate as the Consumer Price Index.

The bill would invest $36 billion in Pell Grants over the next 10 years.

The cost of college tends to go up faster than general inflation, but this provision would “help limit the erosion [of Pell Grants] in value ... and reduce the amount people will have to borrow,” says Lauren Asher, president of the Institute for College Access and Success in Berkeley, Calif.

• Improved repayment options. Borrowers already can limit their monthly federal loan payments at 15 percent of their discretionary income. As of 2014, new borrowers would be able to cap their repayment at 10 percent of income.

• A streamlined federal-loan system. Starting July 1, all federal loans would originate through the Direct Loan Program, in which many colleges already participate. The Federal Family Education Loan Program (FFELP), in which private lenders currently get subsidies to make federally guaranteed student loans, would be eliminated.

This wouldn’t change much for borrowers, who would still get federal loans at the same rates by filling out financial-aid forms and working with their college’s aid office.

• Competitive loan servicing. When it comes time to repay loans, college students and graduates might experience better customer service. The Department of Education would distribute that work to contractors based on cost-effectiveness and quality customer service.

• Support to stay in school and manage debt. The bill directs $750 million to helping low-income students with financial literacy, debt management, and college access and completion. This is intended in part to replace services that were provided through FFELP.

Other provisions of the bill include more than $4 billion for community colleges and historically black and other minority-serving institutions.

With the savings the government is expected to realize, the legislation would also direct at least $10 billion to federal deficit reduction.

Student Aid Fo Education Loan

That’s the conclusion of the Education Sector, which has released a study that focuses on lowering federal student loan default rates.

Student loan defaults are becoming a hot topic as a growing number of recent college graduates struggle to find jobs that pay a living wage. The most recent federal loan default rate is 6.7% which might not sound all that alarming.

That 6.7% rate, however, is a sugar-coated statistic. This official rate only examines a student loan default that occurs within a two-year period after the student loan payments begin. According to Ben Miller, a policy analyst at Education Sector, it often takes 14 months before the federal government even characterizes a record of nonpayments as a defaulted account.

When the time period is stretched to three years, the default rate jumps to 11.8%, which is a 76% increase.

Not surprisingly, for-profit schools occupy the epicenter of college debt crisis. Seven percent of students attend for-profit, higher-ed institutions, but they generate 44% of the federal loan defaults.

Among schools in the hall of shame is Clinton Junior College in South Carolina. Thirty percent of students graduated from the school in three years, while more than 36% of the borrowers defaulted on their student loans.

When evaluating schools, check on each institution’s student loan default rates. High rates can often mean that a school is packaging too many loans in financial aid awards and are not counseling students about managing their college debt.

Don't dawdle on college aid requests

Colleges are bracing for another year of high demand for financial student aid - and that means students need to get their applications in as quickly as possible.

Federal student aid loans remain plentiful, but other types of aid from states and colleges are more limited. By missing one of the many deadlines, students could receive fewer sought-after grants and scholarships that don't have to be repaid, and end up having to apply for loans that do.

"It will be another competitive year," says Sarah Bauder, director of financial aid for the University of Maryland, College Park. Aid applications so far at the state university are up 12 percent over last year, while federal funding for work-study and certain education grants has been slashed, Bauder says.

Blame the continued weak economy for the stiff competition for student aid. Unemployment remains high. Families that have burned through cash reserves now are applying for aid for the first time, aid officials say.

In addition, a bumper crop of high school seniors and more people returning to school for advanced degrees will add to the aid demand, says Patricia Nash Christel, a spokeswoman for student loan giant Sallie Mae.

The first step to getting aid is filling out the Free Application for Federal Student Aid at fafsa.ed.gov. It not only will determine your federal aid, but states and colleges also use the FAFSA to award their money.

The earliest you can submit a FAFSA is Jan. 1. States and schools set their own deadlines for when the FAFSA must be submitted.

The state of Maryland's deadline is March 1. Gov. Martin O'Malleyhas set aside nearly $110 million in his proposed budget for scholarships and grants this year, which could help more than 58,000 students, says Christopher Falkenhagen, director of communications for the Maryland Higher Education Commission.

Schools often set priority deadlines so that applications submitted by that date will be the first batch that aid officers look at when making their awards. Goucher's deadline, for instance, was Feb. 1. The Towson college typically awards $22,000 to the neediest of students, about half the cost of attending the college for a year. In years past, the college has been able to offer that amount of aid even to students submitting the FAFSA after the college's deadline, says Sharon Hassan, director of financial aid.

But this year, with aid applications more than double those of a year ago, Goucher might be forced to be less generous with latecomers, Hassan says.