College costs have outdistance inflation by nearly 40% over the past 5 years. While government has been subsidizing education, many of these subsidies have been going to loan corporations like Sallie Mae, not students.

A new bill that was approved in the House of Representitives and is headed for the Senate may slash government subsidies to lenders by as much as $18.3 billion. To offset this drop they are also increasing Pell grants for students by over $500 over the next for years. The NYT reports on the changes

As well as cutting lender subsidies, the bill reduces the share the government would guarantee in the event of student default. It halves the interest rate on federally backed loans gradually over the next five years, to 3.4 percent from 6.8 percent, and would limit monthly payments to 15 percent of the borrower’s discretionary income.

The bill raises the maximum Pell grants by $500 over the next four years, to a total of $5,200 by 2011. It also grants $5,000 in loan forgiveness for police, firefighters, prosecutors and other public servants, and a complete release from student loans for public servants after 10 years. It would also provide for complete forgiveness of federal student loans after 20 years for economic hardship.

In that article they also said that the smaller student loan providers are likely to be hardest hit. That is not for the least of reasons because they can’t compete with equal marketing budget, and at as many as 800 US colleges the top loan provider offered over 70% of the student loans. Andrew Cuomo has been investigating some of those backdoor deals at Sallie Mae, Nelnet Inc., Education Finance Partners Inc., EduCap Inc., the College Board, and CIT Group Inc. for many months.

According to Cuomo, investigators found:

• Lenders pay kickbacks to schools based on a percentage of the loans directed to the lenders.
• Lenders foot the bills for all-expense-paid trips for financial aid officers to posh resorts and exotic locations. They also provide schools with other benefits like computer systems and put representatives from schools on their advisory boards to curry favor.
• Loan companies set up funds and credit lines for schools to use in exchange for putting the lenders on their preferred lender lists and offer large payments to schools to drop out of the direct federal loan program so that the lenders get more business.

This past spring the big-time world of student loans was rocked to its foundations when it was discovered that several financial aid officials were in the back pockets of some student loan lenders. The heyday of “you scratch my back and I’ll scratch yours” is over as far as preferred lender lists at colleges go. One bad apple…. But are lenders the real enemy?

Sunshine Act—Push for More Federal Loans That Just Aren’t There

Now colleges and universities that favored a single lender will be expected to offer students optional lenders, no more playing favorites. The Student Loan Sunshine Act was spearheaded by Senator Ted Kennedy as a way to show the government’s support for students battling with college finances. And the Sunshine Act is also an attempt to undercut the need to resort to private or alternative student loans.

Kennedy is not alone in his concern that there is an alarming trend toward private loans, possibly impelled by overly aggressive marketing tactics. He would prefer to see borrowers really exhaust all their federal loan options first. Of course, private student loan lenders are selling a product; that some actually need.

Their message: you CAN qualify for additional loans and completely cover the cost of your tuition, and maybe even get approved for money to cover those extra sundry expenses you were concerned about, too. If not my bank, then who?

The Hand That Feeds

College tuition costs have not stopped rising. One could argue that a college education is one big commoditized package that colleges, banks, and the federal government all want in on. But messages are mixed. As much as we want to browbeat lenders, plenty of them sell their warm and soft side—the helpful account managers that make the annual rounds of high school campuses offering one-on-one assistance for a confused herd of parents and students with half-completed FAFSA applications.

We are not conditioned to think that people who help us are bad. Are private lenders bad to try and make college possible? Are colleges and universities out of control with their costs? Why is everyone else making so much money and Americans being strapped so beyond their financial limits? From what other sources could a large quantity of money come, some nationwide bake sale?

How the Confused Can Go Wrong

In an article in USA Today a college graduate reportedly said that his foray into student loans was one big ignorant blunder. He argues that some student borrowers and uninformed parents are so confused by the student loan milieu that it’s easy to be sold on costly private loans well before you’ve really plumbed the depths of the ridiculously convoluted federal loan system.

Desirable Colleges Simply Cost a Fortune

Alternatively plenty of arguments are made for more affordable college options, such as state schools and community colleges. This is all well and good for students with no prejudice for a particular program, but for some students certain private colleges and universities provide a desirable field of study, a necessary reputation that costs money and lots of it. In cases like these, with the exception of the very wealthy, it’s likely that students will not qualify for nearly enough federal aid to cover the cost and will resort to private loans. Here are the real stories of alarming student loan debt.

So in the end, who’s really to blame? Is there a student loan life cycle here that at some point will naturally correct itself?

A recent government inquiry into the “relationships” forged between college financial aid offices and student loan lenders has raised the question, “Is there a correlation between soaring college tuitions and fat-cat lenders?”

The recent New York Times article (“Greater Scrutiny on Colleges and Ties to Lenders,” Glazer) draws attention to the initial inquest, which originated with the New York Attorney General’s Office. As we speak, the Attorney General is sniffing out a slew of college practices to see exactly what stinks.

See, colleges and universities prefer to work exclusively with a particular set of lenders, that’s no secret. And the qualifying criteria for such a relationship? That’s what a growing number of lawmakers want to know.

Back Office Handshakes or Just Good Business?

It’s a matter of course that “lenders use various tactics to curry favor with colleges and universities.” But until now the practice has gone without issue. Unchecked tuition rates in conflict with government efforts to curtail student loan rates, now makes this professional partnership a rug to be looked under. Senator Ted Kennedy (Mass.) has likewise waxed skeptical over the harmlessness of the “preferred lender lists” that many colleges maintain:

“Mr. Kennedy is pushing a bill that would require the disclosure of such arrangements; ban gifts and services worth more than $10 to college employees; and require lenders to tell students that they might be eligible for low-interest federal loans.” (NY Times)

Currently the de rigueur business agreement between lenders and colleges looks a bit like this:

“The kinds of arrangements loan companies may have with colleges vary. One type is the kind that Education Finance Partners has — paying a college increasing sums of money based on loan activity. Other lenders, including Sallie Mae, make money available to an institution for loans to students with poor credit, also based in part on private loan volume.”

Private loans might be the operative term here. Most lenders of course provide the whole menu of federal loans, but they also make a bigger business with their private, or alternative student loans. According to the NYT, private student loans now account for 20 percent of all student loans put together, and they “have grown at an average rate of 27 percent annually since 2001.”

Potential Plot Twists

Players on all sides of the fence have predictions for bettors. Student loans could become a guerrilla marketing mess if lenders are left to appeal directly to college students, or colleges are unable to recommend lenders; student loans could go up, especially for students with bad credit and/or low income levels; or the relationship could be guaranteed fair and just—preferred lenders but based not on back office kickbacks relative to volumes of customers served, but instead on the best rates and service, buoyed up by the college’s forthright reputation.

While the whole brouhaha over cuts in student loan interest rates may seem attractive, even helpful thanks to the political rhetoric, students actually in college or prepping for college will have to look elsewhere for financial relief.

What the Interest Rate Cuts DID NOT Do

A couple of weeks ago the House of Reps voted to cut the interest rates accorded to big student loan lenders. The move, dubbed the College Student Relief Act, was hailed by many as a smart response to the skyrocketing costs of a college education that just don’t stop. Others, like the White House, argued the measure was inconsistent with the real meat of the matter—college costs.

See the interest rate cuts really benefit college grads. They are the party who may see adjustments in their student loan repayment, but for those in the thick of college or looking for financial aid relief now, the whole political handshaking scene is worthless:

“So the College Student Relief Act is really the College Graduate Relief Act – the expansion of a regressive wealth-transfer program benefiting a demographic group earning $1 million more per capita than the hardworking American taxpayers without college degrees who will have to pay for it.” (Baltimore Sun, Carbone)

If Not This, Then What?

The student loan business is really not poised to change very much. State and federal programs are not budging; no, you’re not going to get more money for your Stafford Loans. So if not student loans, then where should college-bound kids look for more cash, because what they have now, ain’t working?

Right now it seems that the biggest break students can get is a two-fold process: scholarships and the savvy to know they can qualify if they work at it.

In Kentucky, plans to create scholarships and grants that would benefit hundreds of college kids and their families are already underway. Eastern Kentucky U., Western Kentucky U., and Morehead Universities are all patting themselves on the back for their contribution to the college cost problem. And we’re not talking a little $200 scholarship for a couple of students. The KY institutions are taking the problem seriously and going after it in a proactive kind of way:

“In the face of persistent evidence that a college education is becoming less affordable, three more public universities in Kentucky have announced financial-aid initiatives to help students.” (Lexington Herald-Leader, Jester)

BEACON Scholarship Program at EKU comprises a set of scholarships, including the Math/Science Scholars program that awards a current 22 students with over $11,000 each; the Regional Scholars program that recognizes the academic fortitude of low-income students with $2,600 scholarships; Scholastic Opportunity Grants will focus on students who are already Pell Grant recipients; and the Transfer Scholarships will assist those students who wish to transfer in from one of the state’s communities colleges.

Western Kentucky U. is launching its “Top it Off” program. The aid measure awards financial aid grants equal to the disparity between a WKU tuition and the federal and state financial aid awarded to low-income students. Future plans are to cover the tuition disparities of over 500 students.

Morehead U.’s Eagle Access Program is also a “cover the difference” program.

Second Part of the Problem—A New Mantra

Still, according to financial aid experts, too many families and students are selling themselves short. Fill out the FAFSA, is the mantra. Whether you think you qualify for aid or not the form is important. Many colleges and universities want the FAFSA for other types of aid. Miss the deadline and you miss out entirely. And typically those who think they don’t qualify are dead wrong.

The biggest news in “Education” yesterday made headlines in the New York Times (“House Cuts Interest Rate for Some Student Loans,” Schemo), the Chronicle of Higher Education, and every other mainstream rag online and off with their ear to the rail. Seems like the Senate has gone ahead and passed a bill that might cut both ways but not without much ado about it. Essentially the new regulations intend to incrementally slug away at guaranteed student loan interest rates charged by the big corporations, such as the ubiquitous Sallie Mae and Citibank, among a rank of others. The plan slashes interest rates in half over the course of the next five years. The purpose, say scores of bipartisan Senators, is to make college more affordable for the middle class.

“According to the U.S. Public Interest Research Group, the bill would save the average student who starts college next year about $2,300 in interest payments over the life of a 15-year loan.” (NYT)

This is good news for the middle class, right? Or does the political rhetoric serve as smokescreen for the real issue(s)?

Cost of Affordability

Ironically enough, at the same time such legal and political measures are promulgated as beneficial to the constituency, you have to wonder if the ramifications loudly argued by Big Lenders are now set in motion to counter any positive actions—kind of a typical lesson in Newton’s Third: for every action there is an equal and opposite reaction.

The bill, of course, costs the government a reported 6 billion dollars. According to the Chronicle, though, the largely Democrat-driven plan delegates a share of the cost to the biggest lenders, whose “profit-margins” will be chopped in the federal 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 services to borrowers being hurt,’ the bankers’ group said.” (Chronicle)

Semantics of the Problem

The issue at hand could open a huge Pandora’s box of conjecture on a range of issues. Not only do the new measures seem to pit the college public against the good of big banking, but it also pits small lenders against large and challenges politicians across the board who will not risk alienating their “middle class voters” (NYT). In fact the real issue might be out of this particular ballpark, altogether—the college and universities themselves whose costs rise faster than the middle class paycheck to cover cost of living and inflation.

The only party, surprisingly, that pointed to this neglected player was the White House, which summarily opposes the new measures:

“The White House statement…said access to higher education should be improved by containing costs. The responsibility for helping families, the statement said, ‘must be shared with colleges, which also have a central role in making higher education affordable.’” (NYT)

Hurry up!

You could be out in the cold on federal and state funding if you are not on the ball (read “early”) in getting started on your Free Application for Federal Student Aid (FAFSA) form. Follow the best advice of Sallie Mae, the largest student loan provider in the country, and get your paperwork handled early. The charge is led by an article today in the The Southern outlining just how many pieces of the FAFSA puzzle you risk missing.

The article emphasizes the importance of filing well before the deadline. But what exactly you might ask is the deadline.

The Deadline

Check out these FAFSA deadlines for federal and state funding. The deadline concept is important: you must consider that every entity that loans money has a deadline for the FAFSA. This means you must make the earliest date to catch them all: federal, state and college. The next most important concept is that there are quite a lot of funding opportunities tied to the FAFSA. It’s much more than just a tool to get a Stafford Loan:

“’The cost of missing a deadline can be measured in real dollars,’ said Martha Holler, a financial aid expert with Sallie Mae. ‘Some states have lots of free money, but if you apply after their deadline, you jeopardize your chance of getting some. And when it’s gone, it’s gone.’”

Filling out the FAFSA is not something to be done over a 10-minute coffee break, either. The FAFSA, it’s already been charged, is a long-winded, dinosaur of a document whether you do it in hardcopy or online—it’s eight long, grueling pages. Not only does it require you provide all manner of information short of the kitchen sink, you also need to apply for a PIN ahead of time. The PIN allows you both access to the electronic version, which is preferred, as well as a means by which to electronically sign the behemoth document before you file online.

Also, make sure you are up to snuff on your home state’s requirements, too. In some cases you may also need to fill out their application to qualify for specific state funds, including loans, grants and scholarships. And of course, make sure you know the deadline for this form if one is required.

The Right Documents

Here’s a list of personal documents you will need to collect in order to get ‘er done:

• Last year’s tax returns. Haven’t done them? Better hop to it. Yours and your kid’s.
• Bank and investment statements and records.
• Drivers license number, social security number, and/or alien registration number.

Think you might make too much income to sign up for federal loans? Don’t waste one more minute trying to run the figures: fill out the form no matter what.

Here is the FAFSA website for your reference.

Dems Good For In-Debt Students?

When the Democrats gained a majority in the House and the Senate last month, many students, parents, and financiers hoped it would be good news for college loan rates. Now there seems to be confirmation, as reported on CNN yesterday, that the Democrats are indeed pledging to put education reform at the “top of their to-do list.” Specifically, Democrats wish to reduce the interest rates on need-based college loans by half. This would mean a reduction from the current rate of 6.8% to 3.4%, a significant difference. Even more promising is the timeframe this change might be expected:

“That will be done almost immediately, certainly within the first couple of weeks of the new session,” California Democratic Rep. George Miller, the incoming chairman of the House education committee, said in an interview.

Given that reforms of any kind undertaken by the government usually move at a snail’s pace, this really is progressive if it happens as they say.

Pell Grants and Public Lending Options
Democrats also wish to increase Pell grants, need-based grants which do not have to be paid back, by over $1000. This initiative would cost about $4 billion, and will happen incrementally over a couple of years. Another option, suggested by Massachusetts Senator Edward Kennedy, is to encourage students to seek student loans directly from the government rather than from banks that eventually get federal subsidies. This form of lending is ultimately cheaper for both the student and the government, but will likely receive friction from Republicans who want to ensure that banks stay in the profitable subsidized loan business.

“I’ll be as blunt as possible: You will never convince me — never — that the federal bureaucracy can do a better job than the private sector in managing the student loan program,” Republican Rep. Howard “Buck” McKeon, the outgoing chairman of the House education committee, said in a recent speech to bankers.

Despite these partisan differences, quite a few Democrats are supporting President Bush’s ‘No Child Left Behind’ plan. However, they have noted that a major issue is that the administration has under-funded the plan by over $5 billion dollars (compared to what Congress asked for). Therefore a goal in the new political climate is to support Bush’s education plan, but to increase the level of funding dramatically and reduce the reliance on standardized testing to dictate the curriculum in schools.

A Fortune Magazine article details some of the past relationships of student loan lenders and for-profit schools (Big Education) and the federal government.

We all understand that tuition has been rising, and student financial aid has not kept up. Will a Democratic-led House and Senate help out the American student? Here’s the most promising quote from the article:

“George Miller (D-California), who is likely to become the new chairman of the House Committee on Education and the Workforce, wants to cut interest rates on student loans in half.”

Read more and you’ll likely learn some new information about government, lending companies, campaign donations, and higher education schools.

Do You Know the Difference Between Federal and Private Student Loans?

I had no idea such a thing could happen until I read the piece in the October 29, 2006 Business section of floridatoday.com.

It seems that students can actually take out a private student loan and not even realize that they are not participating in the Federal student loan program. That’s because some lenders make both kinds of loans, federal as well as private and don’t bring it to the student’s attention that the loan they are actually taking out is at a much higher rate of interest and won’t be eligible for consolidation.

Know thy Loan

Now, this doesn’t excuse the student who needs to read every word before signing on the dotted loan line. Unfortunately, there are some lenders who will take advantage of students who just want to complete the loan application as fast as possible and get on with it. Some lenders thrive on students such as these.

Students too are knowingly making private students loans when they haven’t exhausted their federal loan options yet. With the high price of a college education in the news literally every day and most of us screaming that we need more help with tuition, we really need to do our part to keep costs down. Besides, we’re the ones stuck with those private loans with the variable interest rates so it makes sense we need to know what we’re doing before we take out those oh so easy to get student loans.

Don’t even think you’re getting a federal loan, but know you are. “But I thought Sallie Mae meant it was a federal loan,” you moan 3 years from now. “It is,” I remind you, “but Sallie Mae also makes private student loans and that happens to be the kind you made.”

Do This in Order

Make sure you have exhausted all federal loan options before you even think about taking out a private student loan. Then, shop around for an interest rate you can live with. Most important, know all the terms before you sign off on the loan. If you don’t, it will haunt you later.

Always making the news, the increasing cost of college and student loans are the focus of an article by Michelle Singletary of the Washington Post.

I like how the current statistics were laid out. Here they are at a glance:

Costs

• Average Cost of one year at a public college: $12,796
• Average Cost of one year at a private college: $30,367

Federal Funding

• Maximum federal Stafford Loan amount you can get for all undergraduate study: $23,000
• Current interest rate of federal Stafford Loans: 6.8%

Without generous scholarships and grants, getting into big debt will be necessary. If you are taking out very large loans, make sure you choose a high paying profession or you may be setting yourself up for a life of debt and a high chance of bankruptcy..which will ruin your credit.

Here are some other options:

• Alternative private loans – current interest rates: around 7.6% and 9%
• Have a parent help using the federal PLUS Loans – 8.5%
• Get a job while in school
• Stay at home and commute to a community college for the first couple years