Credit Crunch or Echo Chamber?

August 12, 2008

Every few weeks, like clockwork, one major national news organization or another publishes an article that identifies two or three students who've faced difficulties finding loans to pay for college, quotes one or two college administrators who say they're worried their students won't be able to find loans, and declares, again, the existence of a student loan credit crisis. The Wall Street Journal specializes in these articles, publishing its latest on Monday, but The New York Times and many others have followed suit.

The articles always contain sentences like these in the Journal article: "Most colleges say it's still too early to say how many students could fail to come up with the money to cover their costs," and "Because the government shored up the federal student-loan program in May, which accounts for about four out of five student loans, educators don't believe the problems on the private lending side will lead to a collapse of the broader market." But the overpowering impression is that students and families are reeling because they've found themselves unable to ensure loan funds, and that colleges are finding themselves with loads of nonpaying students.

And that is just not the case, for the vast majority of students and the vast majority of institutions.

Granted, there are concerning signs. Some lenders (private and nonprofit) are continuing to decide not to offer federal or alternative student loans either because they cannot raise the investment capital to offer loans or do not believe the loans are profitable enough to justify them as a sound business practice. The economy continues to struggle over all, prodding (as economic downturns historically do) more people to go to college and to seek federal financial aid to cover their costs.

And at for-profit colleges, particularly, which have the combustible mix of comparatively high tuitions and comparatively lower-income students, significant numbers of students and would-be students are finding themselves unable to find loan providers willing to lend to them at rates that they can afford, if at all.

But most students are not facing that problem. There is widespread agreement among most financial aid and student loan experts that whatever issues that might have loomed involving federally backed student loans -- which account for more than 80 percent of student loans -- have been mitigated if not averted for the near future by the steps Congress and the Education Department took this spring and summer to ensure the continued availability of federal loans. In an upbeat report on its earnings Monday, for instance, Nelnet, Inc., one of the country's biggest lenders, announced that the Education Department's "funding facilities will provide an important source of liquidity, allowing us to make loans to all eligible students for the 2008-2009 academic year," in the words of its president, Jeff Noordhoek.

"I continue to believe that not a single student will have a loan access problem" related to federal loans, said John Dean, special counsel to the Consumer Bankers Association. He and others cited the fact that the federal government's direct loan program has doubled the amount of loan volume it handles without any apparent strain (at least yet), and that the measures the government has put in place to ensure financial liquidity appear to be fulfilling lenders' needs.

Articles like the one in the Journal recite a by-now familiar list of factors that have created both general instability in the national financial markets and particularly uncertainty and worry about the private student loan market, in which about 10 percent of student borrowers participate: the collapse of the auction-rate securities market (which has undercut the ability of many state and nonprofit lenders to raise money to provide new loans), the downturn in the housing market that has undermined the value of many a home equity line, etc. In recent days, the governor of Massachusetts has sought various ways to finance the state's higher education loan agency so it can continue to provide private loans, which it said last month it would no longer do.

(On Monday, though, in a counterpoint to the Massachusetts situation, New Jersey's student loan agency said it had successfully sold bonds to ensure that it could continue to offer private loans to undergraduates in the state.)

On the ground, most financial aid directors (at most campuses, for-profit colleges aside) continue not to see meaningful impact for most of their students. "What we're hearing is that financial aid officers are finding lenders and students are getting approved," said Sarah A. Flanagan, vice president for government relations and policy development at the National Association of Independent Colleges and Universities, which represents more than 1,000 private nonprofit institutions.

To the extent that there has been an effect so far, said Flanagan, it is that banks and other lenders have stopped offering student loans and colleges have been "scrambling" to find other lenders to replace them. "It hasn't added up, so far, to a collective whole where everything collapses."

And several recent legislative and other changes could help ward off any potential private loan gaps for many students. Congress, for instance, raised the limit on the amount of unsubsidized federal loans that individual students could borrow each year, hoping that students who choose to attend moderate-cost public and private institutions could finance their educations that way.

Still, Flanagan acknowledged that she and her colleagues, reading the daily headlines and watching for signs on campuses, are spending a lot of time trying to figure out, "Is the sky falling, is it not falling?"

For months, experts have predicting that signs of serious and widespread impact of the credit crunch were right around the corner.

Now, the tangible signs that the economic downturn is truly affecting large numbers of students and families, Flanagan and other aid experts say, would come at the point -- this month, presumably -- when traditional colleges expect to receive their first tuition payments of the 2008-9 academic year.

If families have been unable to fill the gap between their federal financial aid and their total cost of attending college through the normal sources -- savings, home equity lines of credit, or private student loans -- college business offices will presumably find themselves in coming weeks with significant numbers of nonpaying customers.

If not, it might be a while until the next "sky is falling" story.



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