As the economic crisis deepened during 2008, the turmoil in the housing and credit markets generated most of the more dramatic headlines. But higher education, and particularly the market for student loans, has also been feeling the effects of the ongoing recession. Loan availability is down while financing costs are up. Endowments are shrinking, the job market is stagnant, home equity loans are virtually non-existent, and as private loans dry up students and schools are relying more and more on Washington for support. The government response has been to throw as much as $500 million per week at an expensive public-private partnership growing less popular and more precarious every day, raising serious questions about the motivations behind the bailout.
The federal government provides students with college loans through two main programs. Through the Direct Loan Program, the federal government directly finances loans to students without a private intermediary. In the Federal Family Education Program (FFEL) private lenders–most notably Sallie Mae, cousin to mortgage lenders Fannie Mae and Freddie Mac–provide the money to students, while the government guarantees the loans against default and pays the financing fees during the years students attend school. This latter program accounts for a significantly larger share of overall college loans–$52 billion in FFEL loans were generated in 2007, compared to only $12 billion in direct loans.
Because the government does not have to outlay the entire initial loan, supporters often argue that the FFEL program is cheaper, but the cost advantage diminishes over the long term. According to the Office of Management and Budget, a $3000 dollar FFEL loan costs the state $157 dollars to service and finance, while a comparable direct loan only costs $23 dollars in fees. Projected across a year’s worth of loans, the difference comes out to a potential savings of $4.4 billion. “Direct is almost certainly cheaper,” says Sandy Baum, a senior policy analyst for the College Board, begging the question whether the additional federal money would not be better spent on generating new students loans, rather than covering the servicing fees of financial institutions.
Last year, Education Secretary Margaret Spellings announced that the Department would expand the amount of direct loans available, but thus far only $18 billion of a maximum of $30 billion has been disbursed. The shortfall in federal loans has exacerbated an already dire situation, as private lenders sent reeling by the financial meltdown have also shut off access to additional credit. Since the subprime crisis began, at least 168 lenders have dropped out of the FFEL program, forcing many schools to rely increasingly on direct loans for their students. According to a recent study by Student Lending Analytics, an independent group that evaluates potential lenders for colleges and universities, almost 30 percent of schools that currently use the subsidized FFEL program are considering switching to direct loans. Financial aid officers cite the administrative ease of dealing with only one lender and the related cost reductions, and shortened wait times for students as among the reasons for switching to direct federal loans.