<p>Collapse</a> of loan market, change in rules have families scrambling - The Boston Globe</p>
<p>Families? The article only cites the difficulties for one family. The article concludes, "I guess it's going to be OK," Maria said. "It's just an extra hassle."</p>
<p>Yes, these are trying times, but one could probably have written an article like this every year for the past 20 years. Quite frankly, I am surprised we haven't seen more stories like this in the newspapers and on CC given the talk of a student loan crisis in the past 6-12 months.</p>
<p>Well, the story is using only one specific case to illustrate a wider problem. In MA, where this family resides, MEFA is big not only for residents but also for OOS students attending MA colleges. So changes in MEFA policies affect a lot of students. They were introduced last April, but the tuition bills are due August 1.</p>
<p>Its possible that the family's biggest problem is the non-renewal of the $6000 scholarship. Sometimes schools use those as enticements to enroll, and they are very hard to retain in the second year.</p>
<p>It is SOOO important to understand the economics of any merit award for the out years before making an enrollment decision. We had the letter from the school's merit program stating they had the funding for all 4 years before we accepted. Of course, need based aid is not guaranteed either since they re-evaluate need each year. Everyone needs to understand the economics before they commit. </p>
<p>This loan issue may actually precipitate readjustments of the spiraling tuition, too, with any luck. Colleges have been immune to the economic forces since loans were readily available and the credit mentality prevailed. There may be pain for a little while, like in housing, with some help needed for those stuck during the changing rules. But in the end might not be a bad thing. I couldn't believe the "financial aid" the schools sent us - with a straight face- that were loans. I never considered that "aid".</p>
<p>Well any number of problems attendant to the article. </p>
<p>About the direct loan program, its been in place for years. But internal directives within the USDOE essentially had the direct loan program minimized in profile. In favor of the corporate loan sub/unsub system. Not quite surprising given the number of USDOE appointees who were taken directly from companies such as SMC and NNC. </p>
<p>A problem which isn't getting much press is that companies like SMC are over leveraged. There have been precipitous declines in their grossly over valued stocks. But where that will lead is another bailout, such as the millions handed over in the recent funds to 'save liquidity' in the SL market. This time however a proposed bailout would be in the billions or trillion range. Which of course will leave that much less money for governmental non-load aid. And do nothing for
the borrowers caught in an avowedly predatory loan system, so any bailout will be short lived in effect. </p>
<p>Singersmom, quite astute in your assessment, "This loan issue may actually precipitate readjustments of the spiraling tuition, too, with any luck. Colleges have been immune to the economic forces since loans were readily available and the credit mentality prevailed" </p>
<p>The average 6% yearly increase in tuitions closely coincides with the reduction in support grants and student grants in favor of the loan based model. So there is little incentive for colleges to keep the books in order, as any financial liability is simply transfered down to the student borrower.
But equally problematic is the moral undermining which has been attendant to the increased presence of corporate SL entities on campus. As was very evident from the NYS AG's investigation the kickbacks and scams were rampant. And in some cases still are, SMC has violated agreements made with
The NYS AG to quit. And obviously in states not affected by the NYS precedent, the nonsense and scams still go on. </p>
<p>For example, schools do use scholarships for recruiting. But in some schools (such as part of the University system in Colorado) the initial vetting for student scholarships is actually being done by private corporations-and obviously they'll ensure scholarships are minimized as to do otherwise is not in the interests of their bottom line.</p>
<p>That's a scary article, certainly.</p>
<p>Dumb question...so, given the current loan market situation, it's very possible that a student wanting to enroll in college in fall, 2009 would not (or his family would not) be able to even <em>borrow</em> the necessary funding if they didn't have much ready cash saved?</p>
<p>Possibly that could be the case. </p>
<p>What's likely going to happen is a hiatus until one side or the other in the current SL controversy wins out politically. There is a substantial lobby pressure by the SL companies to keep their government largess and the current regulations which favor their status. There's already talk of another massive bailout for these companies, despite their incredible stock values and earlier profits. How exactly does a company (SMC) who had stocks rise in value some 2000% since privatization, and has fee revenues increase 220%, manage itself so poorly as become over leveraged and in trouble? </p>
<p>But there have been enough people caught in by the admittedly predatory SL lending practices that they will be a factor, especially as the economy worsens. They could be as politically influential as have the people caught in the mortgage mess, insofar as neither can be ignored for too much longer-if the politicians want to keep their status. </p>
<p>So it may come down to which establishes the greatest political presence over the next year, an established lobby which literally bought itself into congress and the USDOE, or an increasingly large number of irate people whose tolerance for the current system is about exhausted. </p>
<p>Problem is students and families shouldn't have to borrow themselves into being essentially loaned and owned sharecroppers to pay for their education. The US system is a disgrace. Especially compared to other countries which can successfully educate their people without economically subjugating them through educational financing.</p>
<p>Thanks for that analysis, Atana.</p>
<p>The thing is...right now, while staring down college for 17 yo, I'd like at least the <em>opportunity</em> to be an educational sharecropper, if necessary (vs being someone w/no chance to work the land at all!!!)</p>
<p>This reinforces our decision to finance our daughter's education without loans.</p>
<p>"This reinforces our decision to finance our daughter's education without loans"</p>
<p>Very wise given the almost overtly parasitic nature of the current loan environment. </p>
<p>Joynne Smith, </p>
<p>For your generation it will be a substantial issue. Especially insofar as the system which was largely propagated in the last generation, is coming unglued. And largely because it did become very predatory, and so it exceeded the abilities for those subjected to its venue to pay. And there is a certain irony in that condition as many of your profs will be members of that afflicted generation. So many of them know how troubled that system is, but having their income contingent on that same system, many will not comment overtly. It's a matter of Die Gut Soldaten Sweik falling into line because there's nowhere else to go...</p>
<p>The catch 22 is it effectively was a bubble not dissimilar to the mortgage mess, but the difference is that a lobby presence for those adversely affected has not yet been effective. (they can't literally buy powerful members of the education committee as have the edudebt industry). But there some powerful consumer rights organizations which might be on the verge of much greater expansion such as Collinges group. </p>
<p>But the defining problem will be moving away from what is avowedly a failed system. To get an assessment of how troubled it actually is, read the Chronicle of Higher Education, especially Paul Baskin's articles. Or Higher Education Watch. The trouble is, systems and people tend to re use failed solutions well after other modes are drastically needed, simply because at some distant point that was what was done-or because it benefited a limited class of people. Barbara Tuchman and Jared Diamond wrote quite well about these type of systemic failures. </p>
<p>So it may not be a matter of saving the current system. But one of realizing that other modes are what is essential. To incremental degrees its already happening-as is evident from the Canadian reforms of this summer, or the move by some to pressure congress to adopt the Australian system in regards to student loans. These are transitional steps, obviously the best alternative would be systems which do not require students hock themselves to become educated. And these other systems do exist, and have been quite successful in the countries which have adopted them.</p>
<p>If you have a lot of time and some interest, the Sallie Mae earnings conference call transcript is available for viewing.</p>
<p>SLM</a> Corporation Q2 2008 Earnings Call Transcript - Seeking Alpha</p>
<p>Everything here, everything were seeing, all the indications from schools are pointing towards a significant increase in demand for federal student loans this upcoming academic year. Its coming from higher loan limits both last fall as well as that were passed and effective July 1. Its coming from the reduction in alternative sources like home equity lines and its just coming from the fact that people who previously paid with cash now need to borrow. So, all of those items combined we would expect to see a material increase which is where we get to our $20 billion worth of federal loan originations for this upcoming academic year.</p>
<p>"The contingent collection business remains a core strength. We see reasonable economic growth opportunities there. We see it as a predictable earnings source and weve got broad in-house expertise in the collection business" (Seeking Alpha)</p>
<p>Disturbing as Lord seemingly admitted that SMC's avowedly moving into collections as a core component. Which entails trouble for student borrowers.</p>
<p>Loans to these borrowers produce consistent and predictable seasoning patterns. Charge offs occur early in the repayment cycle, primarily due to the failure to graduate. If a borrower makes 12 payments once they enter repayment the likelihood of charge offs decrease dramatically. Similarly forbearances typically peak within a year of entering repayment and what we are seeing in our portfolio is consistent with these patterns based on the seasoning and the macroeconomic environment (Seeking Alpha)</p>
<p>And that's why some are pressuring the department of education to track loans beyond 2 years. The stats on deferments and defaults are much lower than the actual situation because of the lack of long term tracking. Plus its been a common and questionable practice for companies to report deferments to the feds as remedied defaults which could be very misleading in regards to the 2 year surveys. </p>
<p>Given current market conditions and without any further policy changes, we would have little option but to put all eligible loans through the Department of Education. With the additional fee income from the put, the earnings prospects for 2009 including the impact of higher funding costs should grow 30% to 40% over 2008. (Seeking Alpha)</p>
<p>Admission of more enhanced fee revenues? Since privatization these have already gone up 200%+ </p>
<p>There is discussion on that issue. Unfortunately, I think some of the other issues going on that the government has been working on the last couple of weeks have distracted them particularly those more in the treasury side but we continue to have those discussions both with the Department of Education, Treasury and members of the hill (Seeking Alpha) </p>
<p>Higher Ed watch has noted SMC had planned a lobby effort to counteract for expected shifts after the elections, looks like they're already on the move.</p>