Consumer Law

Response to the Boston Globe on the Student Loan ?Crisis?

By Deepak Gupta

by Deanne Loonin
(Director of the Student Loan Borrower Assistance Project)

There are many changes going on in the credit world generally and in the student loan industry more specifically, but the April 17 front page article in The Boston Globe, ?Credit Crisis Leaves Students Unable to Count on Loans? presents a distorted picture. This misleading article is a disservice to students and their parents who are trying to figure out what is really going on.

The article opens with Anthony Norton, a student at UMass whose funds were temporarily cut off after TERI?s bankruptcy. This was a temporary glitch, no question, but it involved private student loans only. The article fails to make this essential distinction. TERI?s bankruptcy will have no affect on the federal loan programs because TERI only guaranteed private loans. Federal loans, in contrast, are guaranteed by the government. Although private loan volume has grown in recent years, federal loans are still the primary lending resource for students and their families.

The article quotes Northeastern?s financial aid director Tony Erwin that the days of easy access to student credit are over. In fact, there has been no change in a borrower?s ability to access federal loans. And the loan terms, which are strictly regulated by federal law, haven?t changed either. Yes, some private lenders have left the federal loan business, including Massachusetts-based MEFA, but there are still plenty of private lenders taking up the slack as well as a government-based Direct loan program. Senator Kennedy has taken a leadership role in monitoring the federal loan situation and pushing the Department of Education to develop contingency plans if access is truly threatened.

Perhaps Mr. Erwin was referring only to private loans when he was quoted as saying that student loans will be harder to come by and more expensive. In that case, the story should have focused on trends in the private student loan industry. Further, it should have highlighted that credit checks are nothing new in this business. Tighter standards may be a new trend, but there is such a dearth of data about the private student loan business that we don?t yet know if this is occurring and if so how widespread any such changes might be. With respect to access to private loans generally, private lenders have so far been cutting back mostly on their subprime (the most expensive loans) rather than their prime loans. Note, for example, that MEFA has chosen to exit the federal loan business, but stay in the private loan business.

Unfortunately, this article feeds into a general media trend of misleadingly portraying lenders on one side crying that the sky is falling and consumer advocates and others stuck in the ?everything is fine? camp. As in so many cases, the real picture is more nuanced. There are some very serious problems with the student loan industry. These should be reported responsibly so as to avoid unnecessary panic among students and parents. The media can help reassure students that the federal loan programs are alive and well and should always be the first choice to finance higher education. (this is noted in the ?Tips? section of the article). The private student loan market is more volatile due to a host of reasons, including lenders that aggressively marketed unaffordable loans. Despite the volatility, prime borrowers in particular should still have access to private loans. They might have to shop around more and might have to provide additional evidence of credit worthiness, but this is hardly a crisis. It is in some ways a good thing if it signals greater responsibility on the part of lenders to make loans only to those who can afford to repay. We can then turn our attention to promoting equal access to education in ways other than high rate lending, which leaves many borrowers buried in debt.

Full post as published by CL&P Blog on April 18, 2008 (boomark / email).