Monday, June 02, 2008

Community Colleges Losing Student Lenders--Good Riddance!

This is perfect. Just in time for the election season, banks like Citibank and JPMorgan Chase
are demonstrating that they're in the student loan business not to help people go to college, but to make a buck. They're dropping community colleges and for-profit colleges from their rolls as the credit markets tighten.

On the one hand, you can't fault banks for acting like businesses, because that's exactly what they are. Loans to low-income students at lower priced colleges tend to be smaller, representing less profit for the same amount of effort to the lender, and they may have higher default rates, especially in the case of for-profit "career colleges".

On the other hand, why in the heck did we put profit-seeking businesses in the middle of the student aid process in the first place? Taxpayers guarantee 97% of these banks' money, and yet at the slightest increase of risk, lenders are leaving needy students in the lurch and forcing them to find new loans. A better alternative exists: the federal direct loan program. By expanding that program, in exchange for increasing that guarantee from 97% to 100%, we would be guaranteeing one, simple, dependable, affordable option for all students who need a loan to go to college.

One community college financial aid person I spoke to today said she was considering switching her school into the direct loan program for all these reasons. I predict more colleges will follow, and that will be a good thing for students. Taxpayers will benefit too, because the direct loan program is cheaper without the trouble of subsidizing businesses that will leave when the going gets rough.


Anonymous said...

Anya --

You generally give savvy financial advice to young people, but when it comes to student loans you don't know squat. I worked for the US Department of Education for 14 years. It is completely dysfunctional and inefficient. The place is filled with overpaid dead wood managers with no experience outside of the federal government who can't be fired, and the student aid programs are totally dependent on greedy contractors that overcharge the taxpayers because they have bureaucrats over a barrel.

It is unfortunate that you are so committed to socialized student loans. Last year, you and other misguided liberals pushed for unworkable price controls on what lenders can earn. Now students are paying more for their loans than they did before, have fewer choices, and most of the neediest students can't even get the money from their lenders to pay their upcoming bills. It's too bad that you seem to be basking in the anxiety and hassle that students around the country are now facing.

I took out my student loans with my hometown bank and they were serviced for most of my repayment by Sallie Mae. They processed all my payments correctly, and answered my questions the first time at whatever hour I called. I think most people are like me and would rather deal with financial services professionals over government bureaucrats and contractors any day of the week.

Americans deal with private banks, credit unions and finance companies, in every other facet of their lives from checking, savings, credit cards, auto loans, and mortgages. Moreover, federal loan limits don't come anywhere close to students' financing needs and they have to borrow private loans even at Direct Loan schools. Most colleges have chosen not to be in Direct Loans and many that were in that program chose to leave it. Why do you want to push everyone into an inefficient, one-size-fits-all government boondoggle?

Anonymous said...

I'm curious to know if these student loans could qualify for CRA credit for the banks involved. While they could likely find other deals that could make up the dollar-volume they would be losing by not making student loans, it's a service that banks should offer if practical.

Anonymous said...


Anonymous said...

Dysfunctional and inefficient describes state government as much as -- and likely much more than -- federal government. The guaranteed student loan program ("FFEL") is dominated, at least politically, by inefficient and dysfunctional state government agencies that do not face the accountability measures of the federal government. These state government agencies, which function not only as guaranty agencies and secondary markets but also as lenders, are struggling to enter the high-tech era. It is easy to fire federal managers; they do not have any of the protections of nonmanagerial employees. Many state governments are still dominated by union rules which were phased out of the federal government in the late 1940s.

FFEL is chock filled with manager with no experience in banking or financial services. They cut their teeth in many cases working on Capitol Hill, where they make the connections they need to succeed in a program where the free market is as foreign as Mars. People from "the Hill" often believe they are "superior" to those from the private sector or federal sector but in truth "the Hill" is not where anything is accomplished. Passing a law in and of itself does not accomplish a thing. It has to be implemented. In some cases the private and federal sectors have a hard time implementing because the 20-year-olds on the Hill have little real world experience in the private sector or in the Executive Branch of the federal govt.

It is hard to argue that a social welfare program dominated by state government agencies is not a socialized student loan program. Implementation and execution are not the same as program design: on paper direct loan is more free-market than ffel. If there is dissension about the implementation or enforcement of the competitive contracts, then maybe some of the "high powered" genuises on "the Hill" could lower themselves for a few years, roll up their sleeves, and focus on operations that actually helps customers rather than faux glory on the Hill. The sad part is that if the "Hill people" who allow advertisements from Smoky the Bear and "be all you can be" had allowed even 5% of the marketing from direct loan as ffel is allowed, then the vast majority of the schools would have left ffel long ago. They are only receiving policy advice from guaranty agencies and lenders -- end it shows.

Even at the peak of the so called selective borrower benefits (paid for by the taxpayers with excess lender and guarantor subsidies), the average dl borrower had a bigger benefits package than the average ffel borrower because it did not depend on a lender selling to a certain secondary market or a borrower attending a certain schools or living in a certain state.

Federal student loans is a taxpayer-funded welfare program, and the taxpayers would expect "price controls" to guard their hard-earned funds. The way to phase out price controls is to move to a market-based method for determining the level of subsidies to lenders and guarantors. (The auction enacted last year is not the best method but is a reasonable first step).

Anonymous said...

Yes Trey, federal student loans count for CRA credit. In fact many analysts who met with student lenders over the decades and heard how "unprofitable" the business was tended to theorize loudly that the only reason lenders participated was for CRA credit. This ignored the fact that most lenders were not actually traditional banks. More importantly, it ignored something that BCG discovered in the late 1990s -- that federal student lending was the safest and most profitable credit product around.

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