Presidents and the Student Loan Mess

Presidents and financial aid directors are the two educational leaders on campus who are directly responsible for the success of the whole student, I used to tell audiences, with more than too much bravado.

I was trying to make a point. Every administrator needs to be involved to achieve institutional success, of course. But presidents and financial aid officers deal with a big picture stakes – success or failure of the student.

If the student fails, the institution fails. The president takes the blame.

If the institution fails the student, the student loan may not be repaid. The financial aid officer is on the line.

The latest public crisis in student loans reignites a question that has always haunted me: Why do college presidents too often leave the field of public debate when it comes to the specifics of student loans?

“Unfathomable”, “administrative nightmare” and a “policy backwater” are descriptions of the lending debate that would have encouraged CEO indifference to the politics of student loans in the past.

Collectively, financial aid officers, banks, student advocates and executives of national higher education organizations have controlled the options and the course of the nation’s college financing scheme -- they were the ones with time to deal with the arcane.

Today, however, loans account for more than 30 percent of all payments for college tuition costs. Loan volume has more than doubled in a decade and is still growing. Private college loans, providing funds beyond the federal program limits, have increased by 734 percent in a decade, to $14 billion in the 2004-5 school year.

Can individual college presidents, with so much else on their plates, ignore the foundation, structure and details of the nation’s publicly financed student loan programs, and a thriving private sector alternative?

At their peril. And, at threat to the complicated, but working, system of higher education finance in America.

The latest blow-up is over lender payments to colleges and administrators who designate loan products on preferred lender lists. This is just a seasonal hurricane compared to the climate change in store for student lending over the next decade.

Essential public policy issues, emerging new private sector loan products and direct-to-the-student marketing techniques are going to change the way Americans afford to pay for college.

It can happen with or without college president resolve to assure that the interests of their students and institutions come first.

Off campus “student advocates” or “higher education policy experts” are gaming the current crisis politics to achieve long sought ideological change in these loan programs, which may or may not match a student and institutional requirements.

Among a host of issues, there are some that will directly redefine the nature and extent of student loan availability:

• The future of the bank-based Federal Family Education Loan Program (FFELP) and its sibling the Ford Direct Loan Program (DLP), the latter representing about 25 percent of all federally guaranteed student lending. Advocates for government-as-lender will use the latest crisis to limit the bank program and prefer expanded borrowing from the government, not the market place. Sustainability into all economic futures is the issue here. Will the government assure colleges' access to loan-supported tuition financing under all circumstances? Student loans have become the third largest of the nation’s asset-backed securities markets -- after credit cards and mortgages. The private marketplace has made lending at these levels possible. If not the private market place, can the government swallow the growing need for student loans to pay tuition into the future? At the levels of debt that future costs will require? College presidents might want to assure continued direct access to the market place, not exclusively through policy makers who have various and sometimes conflicting agendas.
• The role of state-based student financial aid agencies as the Congress and president impose a continued financial squeeze on FFELP administration costs, default prevention efforts and default collections revenues. It could mean the end to federally contracted, state-based guaranty agencies, the student financial aid agency in 27 states that are often the backbone of information and training to colleges, students and families. They are the sponsors of Internet-based, go-to-college and early career and college awareness programs. Many agencies also administer state grants and often the college savings program -- assuring local policy continuity at the state level.
• Direct-to-consumer lending, bypassing the college financial aid office and making direct deals with students and parents, may end the current coordinated and guided match between grants, loans and college work -- all without assuring that low-cost, federally subsidized loans are considered before more expensive private loans.
• Consolidation of lenders:Sallie Mae’s recently announced sale to two private financial services companies and two of the largest student loan banks (Bank of America and JPMorganChase) is another signal that market forces -- not public interest -- are driving the federally subsidized student loan business. While Sallie Mae holds 40 percent of total FFELP assets and services 10 million students and parents attending 5,600 colleges, new loan volume at growing value is originating not with banks, but with marketing companies that securitize their loans, selling them to American and foreign financial markets.
• Time to payoff: With the boom in student loan consolidations, the time to payoff of student debt has lengthened from the nominal 10 years to 15 and 20 and 30 years, in some cases. The cost of college is exploding exponentially after graduation by extending interest-bearing loan payments so far into the future. With a possible average payback time easily approaching 15 years for most future borrowers, is it not time to look at other alternatives? British and European loan programs delay repayments further into work life. ”Student securities” plans based on percentage of earnings are being pioneered by the Robertson Educational Empowerment Foundation, allowing a match between future income and debt. These and other innovations should be explored that avoid mortgaging student futures -- drawing out loan payments and interest expense so far into their future

College presidents most often represent the aspirations of their institutions, faculty, and their clients, the students. The president may be the only policy actor to assure that student loans -- the essential, largest, and growing educational financial scheme of the 21st century -- meets the needs of both the academy and student

Student and family interests should coincided with institutional success. I think only the CEO sees that conjunction and must speak out to assure that government, lenders and the entire higher education community meets the financial needs of both colleges and students into the future.

The times are changing. And college chief executives need to reenergize the student loan debate, assuring that the outcome serves the whole student and his or her institutions.