I have to preface this post. If you are borrowing through Direct Lending, some of this information will not apply. The lender crisis is directly related to the Stafford Loan program which uses lending institutions other than the Department of Education.
Here we go again . . . I won't even list the lenders who have recently bailed from the student loan lending industry because I can't possibly keep up. Just recently, Student Loan Express terminated processing of new student loans, and TERI is filing for bankruptcy protection. In my 20+ years in this business, this is by far the worst crisis students and financial aid administrators have faced. For example, I recently processed a loan increase for one of my students using the lender he had used before, only to find out that lender stopped processing loans without telling us. Now, with the end of the semester rapidly approaching, I am scrambling to work with the student in securing a new lender. Not only is this creating new paperwork (or electronic work) for the student, but it is creating a delay in distributing his funds.
When the financial aid world seems to be at its lowest, an article came across my desk last week that makes me wonder if there's a positive outcome. Due to the lender crisis, Congress is looking at ways to still provide affordability to students. Senator Edward Kennedy (MA) has proposed the following:
- Raise the maximum Pell Grant by up to $750 for the lowest-income grant recipients
- Raise the annual limit of student loans by $1,000 (assume Stafford and Direct Lending)
- Allow parents to defer PLUS loan payments while the student is still in college
- Allow schools to designate a "lender of last resort" and provide funding to that lender (Stafford)
- Allow the Department of Education to become a "secondary market of last result" (Stafford)
The increase is Pell Grant is pretty self-explanatory, although who qualifies as "lowest-income grant recipients" has not been specified. Raising the annual loan limit doesn't really address the issue of finding a lender, but at least students will be able to borrow a little more to help fund their education.
I get excited seeing the proposal to allow PLUS borrowers to defer payment until their student graduates. All too often I talk to parents who are willing to borrow an educational loan but can't afford to make the payments while the student is still in college. Most of these parents are helping their student in other ways as well. The only problem I see with this is borrowing more than is needed with the "pay later" attitude.
The "lender of last resort" is another good option because it means schools can recommend a lender with confidence. The government will back this lender with enough revenue so the student will not encounter borrowing and later find out the lender has bailed from the student loan program. This will provide consistency for the student.
The "secondary market of last result" means that the Department of Education will buy your loans from a defunct lender if your new lender cannot afford to do so. I have found that new lenders for our students will usually buy their loans from the old lender, but some new lenders cannot afford to do this.
It's funny because this article came from Inside Higher Education, but when I went to the US website and Sen. Kennedy's website, I couldn't find any additional information. Rest assured, not everyone in Congress is behind this proposal, and it's going to be one of many. From what I've read however, Congress is supportive of ways to deal with the lender crisis by examining ways to make college affordable.
If you read this, you are affected! Now is the time to contact your federal legislators and provide your input. Financial aid administrators unite and voice their concerns, but individual constituents can have the most impact.