The subprime mortgage crisis, which tore through the financial markets over the last year, has reached student loans. Officials at GW are wary, but confident that students here will be able to find loans to cover the University’s sky-high tuition.
While no schools or students have reported problems accessing aid yet, potential shortfalls have sent Congress and financial aid offices scrambling to ensure students will be able to find financing.
“I’m not pushing the panic button. I think we’re OK, from what I’ve heard,” said Dan Small, director of student financial assistance at GW.
Student loans issued by brokers have traditionally been resold to investors on bond markets, since brokers rarely have the funds to cover the loan themselves. But the collapse of the market for home mortgages last year made such debt a pariah for investors, and student loans are the latest victim.
Most student loans are guaranteed by the federal government through the Stafford and PLUS loan programs, which are limited. Last year, students received about $60 billion in such loans.
As tuition has risen, students have turned to private lenders who offer more expensive loans to make up for the shortfall. These loans have grown in total from $1.6 billion in 1996, to more than $17 billion this past year, according to the College Board. Despite the exponential growth, they are also particularly vulnerable to the financial market’s current ailments.
“I think the private loan end of the market is going to be much rougher than for loans backed by the government,” said Frederick Joutz, a GW professor of economics.
Unable to finance new loans, some brokers are pulling out of the market altogether. In recent months, more than 50 lenders have ceased making loans, according to The Washington Post.
Lenders are also raising credit score requirements and interest rates, becoming more selective about which students they loan to.
“Private loans are changing,” Small said. “They’re not going to give easy loans anymore.”
These problems have also drawn the attention of Congress. At a hearing on Tuesday, Sen. Christopher Dodd (D-Conn.) called on regulators to extend funds to student loan markets and warned against a possible “student loan credit crunch.”
Reforms proposed earlier this month by Sen. Edward Kennedy (D-Mass) and Rep. George Miller (D-Calif.) would increase the amount students could borrow under the Stafford loan program by $2,000 a year, let parents defer loan payments until students graduate and allow the Department of Education to buy student loans from brokers.
This measure would help brokers issue loans even if they could not find buyers on the bond market, but would add billions of dollars in new expenses and risk to the federal budget.
“Increasing the Stafford loan limits is definitely a good idea since it makes students less dependent on private loans,” said Sandy Baum, senior policy analyst for the College Board. “It’s a different question whether the government should do more to subsidize the market, and one I don’t know the answer to.”
Luke Swarthout of the U.S. Public Interest Research Group said lenders might abuse such measures.
“It’s reasonable and responsible for Congress to put some additional safeguards into place, but those safeguards should not create loopholes for abuse,” he said.
Regardless of the outcome in Congress, Small said he has confidence in GW’s position. The default rates for GW students were typically less than one percent, and he noted that the University anticipated many of the current issues and revised its aid accordingly.
“They know the students graduate and pay it off,” Small said. “We think these strategies are still going to be okay, and we’re reviewing them constantly.”
But Small said he is worried about the roughly 5 percent of GW students whose low credit scores will make them ineligible for private loans.
“Where is that money going to come from?” Small said. “That’s the dilemma we’re faced with.”
He said, “I’m not trying to panic them, but these students need to sit down with a financial counselor so they know all of their options and understand how this is going to affect them.”