Student Debt

The San Francisco Chronicle August 14, 2008 Editor - "Students seek aid in record numbers" Aug. 11 highlights an important trend, but could leave readers confused about the availability of federal financial aid. While there are caps on how much you can receive in federal grants and loans each year, there are no limits on how many students can qualify for these important funding sources. And if students' financial circumstances take a turn for the worse, they should always let their college financial aid office know. In certain circumstances, such as a parent's job loss, the college can adjust the student's aid eligibility. Even if they don't qualify for more grant aid, federal loans can help both students and parents bridge unexpected financial gaps more safely and affordably than credit cards, home equity, retirement funds or private student loans. Debbie Frankle Cochrane The Institute for College Access & Success Berkeley

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Iowa legislative staff interviewed Robert Shireman after his testimony to the Iowa legislature's Government Oversight Committee.

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In our testimony to the Iowa legislature's Government Oversight Committee yesterday, we recommended that the state seek details on the rates charged to students by the Iowa Student Loan Liquidity Corporation, the nonprofit lender created by the state. Mark Kantrowitz, publisher of FinAid.org, agrees with us and suggests additional information that should be disclosed by lenders. He also dismisses nonprofits' claims that rate information should be kept secret:

"Ideally, I'd like to see lenders disclose the mappings from credit scores to their rate tiers and not just the tiers themselves. Add a FICO Score Range column to your table. The lenders insist that they cannot or will not do this voluntarily because it reveals competitive information. But it's really all about obscuring the mapping from borrower characteristics to rates. Yes, if lenders had to publish their tiering, there'd be more competition. But isn't that the point? If lender X knows that lender Y's cutoff for LIBOR + 2.0% is FICO 750, lender X can potentially undercut with LIBOR + 1.8% at FICO 760. By making the mapping opaque, they minimize the opportunity for competition. But, frankly, it also probably has a lot to do with making it harder for borrowers to shop around by forcing them to apply to obtain rate information. Lenders don't want clear information because student loans are a commodity, and if they let it behave like one, supply and demand will drive down prices." "It's especially egregious when a state agency protests against releasing detailed pricing models for competitive reasons. What they're saying is that if they release the data, their competitors will be able to undercut them on price. Why is that a problem? Either it will force ISLLC to cut prices, or their borrowers will go elsewhere to get lower prices. Either way ISLLC's mission to enable students to pay for college is met. Of course, more likely ISLLC is not adequately aligning pricing with cost, profiting from some students to subsidize others, and so will be prone to price competition on them. But the real problem is you have agencies thinking about profits first and public benefit second."

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By strong bipartisan votes, the Senate and House of Representatives passed the College Cost Reduction and Access Act in early September. On September 27, President Bush signed the legislation. Public Law 110-84 includes a new Income Based Repayment plan modeled on our Plan for Fair Loan Payments. Along with the substantial increase in Pell Grants, this is the most significant step forward that we have seen in years. For more information, see our fact sheets: Key Provisions in H.R. 2669 and Fair Loan Payments.

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By Deborah Frankle, Research Analyst Private or alternative loans comprise a growing share of student loans, despite being more costly than federal student loans. Students and parents are often unaware of the differences between private and federal loans, and many borrowers don’t know which they have until they enter repayment. Unfortunately, despite required informational sessions about federal loans, the majority of college financial aid offices are not doing much to educate students about private loans. The National Association of Financial Aid Administrators (NASFAA) recently conducted a survey of how financial aid offices discuss alternative loans with their students, results of which can be found in their magazine, Student Aid Transcript. The survey results showed that 63% of financial aid offices do not address alternative loans at all during entrance and exit counseling, the information sessions required when federal loans are taken out and again when the student leaves school. And while 58% of financial aid offices do provide more information about financial planning and debt management than they are required to, only 25% offer in-depth counseling on alternative loans specifically. Barnard College recently became part of this minority by requiring students or parents who apply for a private loan to talk with the financial aid office before Barnard will certify a students' enrollment (and access to the loan). The goal of these conversations was not to discourage people from taking out private loans, but just to be sure that they understood the differences, cost, and potential consequences involved. Still, this simple policy change reduced alternative loan volume by 73% in one year. The college found that many who initially wanted an alternative loan were not aware of the associated risks and interest rates, and had not fully considered other viable options. Such a huge drop in private loan volume suggests that the students who were initially drawn to these loans might not have really needed them. Preventing unnecessary and risky borrowing is good for students, and should be a goal of all financial aid counselors. If the drop in alternative loan volume experienced by Barnard College is anything near the potential alternative loan decreases possible at other colleges, the 73 of college financial aid offices that do not currently guide students through these decisions should consider doing so.

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By Hilda Hernández-Gravelle, Senior Research Fellow "It is like the white house on the top of the hill," a staff member I interviewed at a community college said to describe the way many Latino / Hispanic students and their families view financial aid. The idea of receiving a free scholarship or financial assistance that does not need to be repaid seems too good to be true. Consequently, sometimes students do not apply for the financial aid they are eligible for. There are other cultural factors for Latinos that can contribute to difficulties securing financial aid services and become impediments to college access. Some of these include: fear of debt; mistrust of lenders; and conflicts between family financial obligations and educational aspirations. While Latinos generally have a strong commitment to education, many believe that if you can't afford to pay for it up front, you can't attend. Such assumptions, along with a lack of awareness in the higher education sector about other cultural differences, make college seem unattainable to students who might otherwise be able to attend. The Los Angeles Times published an excellent story on this phenomenon in January 2007.

Attention to the challenges faced by Latinos in higher education is beginning to grow in the college access field. The Lumina Foundation just completed an important dynamic rich media report and web site on access and success for Latinos. Excelencia in Education also recently released survey results on enrollment and attainment for Latino students. The Chicano Studies Research Center at the University of California at Los Angeles released a report at the beginning of this month on the "mismatch" between Latino students’ aspirations and experiences titled, "An Examination of Latina/o Transfer Students in California's Postsecondary Institutions."

At the American Association of Hispanics in Higher Education, held in Orange County California in March 2007, Mari Luna De La Rosa and I presented The Strategy of Debt: How Hispanic Students Pay for College.This presentation introduced financial aid data and cultural factors that affect how Hispanic students use available aid. In an interactive presentation, we heard the perspectives of financial aid service providers and college administrators, highlighting the need to be aware of and responsive to cultural differences in financial aid service delivery.

The presentation was well-attended and received, demonstrating the need for dissemination of information that shapes understanding of financial aid among different groups. Given the debt aversion that exists among Hispanic students, and the resulting impact on college access, the Institute will explore how to better inform Hispanic students, families and administrators about college costs, debt, and the financing of higher education.

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Public confidence in college financial aid offices has been shattered by revelations of gifts, trips, deals, and kickbacks from lenders. In the resulting confusion, I have been asked time and again: "Is there a web site you can recommend where students can get accurate, complete and unbiased comparisons of student loan rates?" Unfortunately, the answer is no. The sites we have seen take money from lenders in exchange for getting listed. Often, lenders pay a premium to get prominent placement in the user’s search results. In some cases, "comparison" sites actually lead to only one or two lenders out of the thousands in the market. Even on sites that feature multiple lenders, it is perilously easy to be led down the wrong road, ending up with higher-cost loans that do not carry the interest caps and other protections that come with federal loans. I recently logged into SimpleTuition.com to see what loan offers I could get if I decided to pursue my MBA at U.C. Berkeley. The lowest rate on the list (showing up on page 2) was 7.27% for a private loan from a company called Student Funding Group LLC. The price-conscious and time-constrained consumer, having found the best deal, might click on the "apply now" button and end the comparison shopping. Instead, I opened the expanded version of the search results, which revealed that the 7.27% is the "as low as" rate. It’s not a sure thing until I submit a complete application and allow the lender to peruse my credit reports. Still, I had reason to be optimistic. MyFICO.com said my credit is so good that "Most lenders will consider offering you their most attractive and most competitive rates" and may even offer me "special incentives and rewards targeted to their 'best' customers." I should be a slam-dunk for that as-low-as rate of 7.27%, I thought. I proceeded through the application process (no, it didn’t take only a minute, as advertised) and eventually got a rate quote: 8.75% plus 4% in fees, or the equivalent of between 9 to 10% -- much more than the 7.27% that at first appeared possible. Many (maybe most) consumers, after filling out that whole application, would go ahead and take the loan even at the higher rate, assuming there was some good reason they can’t get the as-low-as rate. But I decided to compare. A second lender, Sun Trust, had showed up on SimpleTuition with an as-low-as rate of 7.28%. After submitting, again, a whole application, I received a rate quote of 7.875%. It was much closer to the as-low-as rate, though there was no indication as to whether there would be any fees charged. I inquired via email, and it appeared that there would be no fees applied in my case. Had I found the best loan for me? No, not even close. It turns out that SimpleTuition neglected to tell me about Federal Stafford loans, with rates of no more than 6.8%. And while the list included Federal Grad-Plus loans, I ignored them because the interest rate of 7.92% was higher than the rates I saw on listed private loans. Or so I thought. The important detail that I missed—because it’s not clear on the web site—was that the Grad-Plus loan rates are fixed, not variable like the private loans. That's a critical and potentially expensive distinction. Not all lenders try to push private loans ahead of Federal loans. For example, Wachovia strongly encourages students to get Federal loans before considering private loans. Contrast that with the treatment you get when seeking a student loan through LendingTree.com. The site directs you immediately to a private loan company. And if you express an interest in Federal loans instead of their more expensive private loan, you are told with an ominous lack of enthusiasm: "Federal Loans may be a good option for some families." In fact, Federal loans are the best place to start for nearly everyone. But wait! The lender list at GreentreeGazette.com shows that National City has private loans with zero interest. I applied. The promissory note arrived and I prepared to provide my electronic signature and get my loan. But I noticed that it said that my interest rate "margin" would be 4.25. I perused the rest of the document and found that the interest rate would be LIBOR plus the margin, which totals almost 10%. Plus 4% in fees. Another bad lead. The system is confusing enough without the added problem of colleges' advice being potentially tainted by conflicts of interest. Students in the lending maze need unbiased, knowledgeable advisors. That's the important role that college financial aid administrators should be playing in the process.

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