Jan. 10, 2007

Digging Deeper Into Lender Profits

From the moment it became clear that Democrats would control the 110th Congress, it was assumed that banks and other entities in the guaranteed student loan industry could have a tough time with the new majority. It didn’t take long for that prediction to come true.

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Although Democratic leaders still aren’t saying so officially, financial aid lobbyists said Tuesday that lawmakers have decided how to pay for their plan (estimated at about $6 billion) to cut the interest rate on many student loans in half over five years — and that the legislation they will introduce this week to do so (H.R. 5) would do so by cutting several subsidies that the federal government now pays to banks, guarantee agencies and other participants in the federal guaranteed loan program.

Among the changes, the Democratic plan would:

Reduce the amount that the government reimburses lenders for loans made on or after July 1 that go into default, from 97 cents to 95 cents for every dollar that is not paid back.
Ending the “exceptional performers” program, which increases the insurance payments to loan servicers that consistently comply with Education Department regulations.
Increase to 1 percent, from 0.5 percent, the one-time fee that lenders must pay the government to consolidate a borrower’s loans. (This fee, like some of the other proposals, is described as a fee for lenders, but such costs are sometimes passed on to borrowers.)
Reduce to 20 percent from 23 percent, as of July 1, the amount that guarantee agencies retain from the money they recover from borrowers who default. The rate would drop to 16 percent by 2011.
Cut by 10 “basis points” (or 0.1 percentage points) the return that lenders receive on federal loans.

These changes, many of which were proposed by President Bush as part of his 2005 budget plan to help pay for an increase in the Pell Grant Program, would come on top of more than $12 billion in cuts made last year as part of the Higher Education Reconciliation Act. Lenders decried those cuts, too, although advocates for students asserted that the money really came out of the pockets of students, rather than lenders.

This round of cuts would seem to cut more deeply and directly into lenders’ profits — and, predictably, brought howls of protest from them.

“These budget cuts, when coupled with those made last year, risk the ability of lenders to invest in technology, enhance customer service, and offer benefits to borrowers,” Joe Belew, president of the Consumer Bankers Association, said in a news release Tuesday. “Because these new budget cuts are included in H.R. 5, CBA is unable to support it.”

Noting the cuts made last year, he continued: “The offsets in H.R. 5 are exclusively made from cuts in the [guaranteed loan] program. This program, which has been highly reliable and serves students attending 80 percent of all U.S. colleges and universities, cannot sustain annual deep budget cuts without the quality of service to borrowers being hurt. CBA is advising Members of the House that the new budget cuts in H.R. 5 are not cuts to student lenders but should be viewed as cuts that will impact student borrowers.”

A staff member on one of the Congressional education committees confirmed that the cuts listed above were all “on the table,” but said it would be premature to assume that they represent a final list.

— Doug Lederman

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Comments

Ms. Pelosi still misses main point

So, like her brave campaign to increase the minimum wage for 3% of U.S. workers, Ms. Pelosi, et al., want to make student lending unattractive to lenders.

Well, they’ll probably accomplish that goal, too. Right now, this money market is so lucrative (talk to officials of marginal colleges), new firms are entering. If/when this passes, they’ll leave the market.

Of course, the main problem is the sky-rocketing costs of college, which requires more lending. See Vedder (Ohio U.) on this.

But that would require courageous, frank conversations with higher-ed unions, wouldn’t it? What are the chances of that happening — slim or none?

Utterly predictable and laughable. No wonder students today are so cynical and devotees of “The Daily Show.” This would be humorous, if it weren’t so financially crippling.

L.H.H., at 8:30 am EST on January 10, 2007

I’m Confused

What House bill is this? Where is the link for the actual text of the bill? Has it reached the House floor yet? Why isn’t it at http://thomas.loc.gov/home/c110query.html ?Or is it just a version of STAR (H.R. 1425)? http://www.house.gov/petri/star_act.htm ?

GSM, at 9:06 am EST on January 10, 2007

Status of bill

GSM —

The bill (H.R. 5, as I mentioned in the article) has not yet been introduced. As an earlier article (http://insidehighered.com/news/2007/01/05/dems) noted, it is expected to be formally introduced as soon as Friday.

Doug Lederman

Doug Lederman, Editor at Inside Higher Ed, at 9:10 am EST on January 10, 2007

Poor, poor lenders!

Given the fact that most students have to borrow large sums of money in order to get a college education, the least we can do as a society is offer them the lowest cost loans possible.

The lenders are not worried about providing services to students so much as their “profit margin.”

AJ, at 10:52 am EST on January 10, 2007

Student loan abuses

I had one student last week who took an “alternative” loan out from the largest lender in the country. The interst rate on this loan was 13.72%! That’s ridiculous! I told the student to borrow from another lender and to pay off the high interest loan immediately which she did.

If I had not actually seen the promissory note and the interest rate, this student would have been ripped off plain and simple, and it would have been perfectly legal. This is one case where I strongly support the Democrats. The Republicans should have reined in these predatory lenders but they refuse to do so because that would mean regulating big business. Well, sometimes, these folks must be regulated because they obviously cannot regulate themselves. Let’s not forget that the CEO for Sallie Mae was paid over $40,000,000 just two years ago. That $40 million came right out of students and parents pockets, and it’s a disgrace, plain and simple.

feudi pandola, at 11:16 am EST on January 10, 2007

The Numbers are Amazing

Amazing that cutting just a half percent could make such a difference! Sometimes I believe the whole world could be fixed just with pennies.....

kgotthardt, at 11:21 am EST on January 10, 2007

Documentation

Are either the memorandum from Miller’s office that refers to these possible lender subsidy cuts or the statement from the Consumer Bankers Association decrying the cuts available online? If they are, can links be provided to them?

Thanks.

Matthew, Student at University of Texas, at 11:21 am EST on January 10, 2007

No documentation yet

Unfortunately, nothing is yet available online from either the committee or the CBA. I’ll add links if/when they become available.

Doug Lederman

Doug Lederman, Editor at Inside Higher Ed, at 11:51 am EST on January 10, 2007

Student Loans

Liberals: QUIT WHINNING! America is great because of FREE ENTERPRISE and CAPITALISM. The less government becomes involved, the more people are required to do for themselves. If you love regulation, go live in Cuba. In the words of John Kennedy:"Ask not what your country can do for you, but rather, what can you do for your country” Whinning without any new ideas other than Diplomacy (you know the old adage ‘BS Walks") and “Regulation” is unbecoming!

Philip Buskirk, at 7:50 am EST on January 16, 2007

Risk

I realize student lenders appear to have one of the most lucrative and risk-free business models around. But I think current margins are warranted by the inherently risky nature of lending to students. From a banking perspective, how do you determine the relative risk level that should be assigned to a student borrower who has no credit history, no job, and won’t begin paying the loan back until 6 mos. after graduation, assuming he/she actually graduates? Taking this into account, a 13% interest rate on a private student loan does not seem far-fetched. Also note that prior to the new bankruptcy law, student loans could be written off when filing for bankruptcy. In exchange for 7 yrs bad/no credit, you could’ve financed your education for free.

Caleb, at 10:45 am EST on January 17, 2007

I watched the HR5 debate this morning on C-SPAN. I heard of lower interest on pell grants, help for middle and lower-income students. I heard about the American Dream and about plans made by people who care. It nearly brought me to tears. As the next speaker proceeded on the Republican side, facts were displayed, records shown, quotes repeated, and claims made against this bill which had before seemed so fruitful. I am an English Major at Sam Houston, in the great state of Texas. I am dating and plan to marry a man who would be considered a low-income student. My professional and social statistics would suggest a more likely agreement with the democratic party on this HR5 bill, but I have been taught common sense and logic at no expense to my natural skills,and seeing which side is unafraid of the facts, I must employ at least partial loyalty to that side, which when the bill itself is made available to the people, i sure will transcend partiality to full-fledged solidarity. Republican logic and fearlessness has proven itself time and time again, and I hope for it to do so this time as well.

nikki, Froma college student at Sam Houston State University, at 12:25 pm EST on January 17, 2007

Risk levels on student loans

Caleb wrote that a 13% interest rate on a private student loan seemed reasonable given the risk level. Home mortgage rates are only about 6.5% and those lenders assume far greater risk overall than any student loan lender. Also, the new bankruptcy laws make sure that students cannot skate on these loans. They are not dischargeable through bankruptcy. Furthermore, those professions that require licensing like nurses, lawyers, and accountants, now have an additional hammer to make sure students pay...they can have their licenses revoked if they renege on these loans.

With these new safeguards in place, there is no financial reason, other than greed, that student loan rates are at the current levels.

feudi pandola, at 1:05 pm EST on January 24, 2007

What you dont know

What you dont know is that the lowering of the rate is actually on the subsidized portion of the loans and those loans do not collect interest while the student is in school, so the student is paying no interest on that loan. So who pays that interest? Why good ol’ uncle sam, why would they want to cut the interest rate on a loan that does not accumulate interest, they need to do it on the loans that do like unsubsidized. This bill is up side down. It’s so hard to get qualified for these unsub loans you need to be below poverty. For ecample a freshmen starting out in school will get a 2,275 dollar stafford loan, maybe a portion of that will be subsidized but the bulk will be unsubsidized. Lowering the rate on a loan that the student does not have to pay interest on is simply retarded.

Felix Valencia, What you dont know, at 4:45 pm EST on March 2, 2007

One more thing

One more thing! The rate reduction only lasts for about 4 to 5 years so by the time a freshman student is graduating the loans are right back where they where 6.85. So now when the loan is accumulating interest there is now relief.

Feklix VAlencia, at 7:55 pm EST on March 2, 2007

What will students do ?

What will students do ? With the rising costs of tuition and books in universities and community colleges, where else will they get their funding ? fasfa does not give most students the money they need , federal staffords usually dont cover a 1/3 of the cost of tuition and books, and not all parents are willing to take out a PLUS loan for their children.This bill is a waist of time , and i’m sure our ( LEADERS ) could be focusing on other issues facing our country!!!

kevin murphy, at 8:00 pm EST on March 2, 2007

Switch & bait

My son signed his promissary note when he went through his exit interview with Austin College. He thought he was graduating. He was congratulated by Dr.Gipson who could nopt remember that he gave 1 of his nine student a D+ which caused my son not to be given his diploma. Yet no one from Austin College told him and let him be humilated in front of his family thinking he graduated. According to the Austin College handbook, Thomas should have been told and retaken Organic Chemistry that summer at AC. However, Austin College doesn’t offer any chemistry classes in the summer in violation of their own code of conduct. I paid 12,000 for my son to live in a nasty Days Inn motel because of its inability to provide housing. His original dorm was condemnded and the school felt that Dats Inn was a viable option. Now the school is trying to change the prinicipal on a loan agreement after the loan disclosure was already signed. Be smart for your children, Stay away from Austin College!!!! It is a rip off.

Zoe Ann Ludlum, Co-owner Compass Energy at Austin College, at 2:46 pm EDT on March 14, 2007

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