Aid reform will offset tighter loan standard

While tightening loan standards are starting to constrict financial options for college students struggling with steep tuitions, Yale’s latest financial-aid reform — which eliminated the need for student loans — will protect most Elis from market turmoil.

The nation’s recent economic downturn has spelled rocky terrain for student loan providers, forcing many to offer less than ideal loan packages to students — even those in the low-income bracket. On Thursday, the New York Times reported that one of the nation’s largest lenders, the Pennsylvania Higher Education Assistance Authority, had joined several other lenders in choosing to stop offering federal loans to college students.

This comes after Sallie Mae, the country’s largest private-student loan provider, announced in late January that it posted 1.6-billion-dollar losses in the fourth quarter alone, due partially to defaults on student loans.

Still, thanks to the University’s new financial-aid initiative, most students at Yale — and at other schools where it is uncommon for students to default on their loans — will be able to avoid such loan trouble, outside experts and University officials said.

As part of the largest financial-aid reform in Yale’s history, the University announced in January that it would entirely eliminate the need for student loans. In addition, Yale families earning less than $60,000 annually will not be asked to contribute toward tuition, families making between $60,000 to $120,000 will contribute up to 10 percent of their total income, and families making between $120,000 and $200,000 will contribute on average 10 percent of their income.

“It couldn’t be better timing,” said Caesar Storlazzi, Yale’s director of student financial services. “Yale has essentially gone to a no-loan school in terms of financial-aid awards.”

But regardless of the University’s aid reform, some Yalies will continue to take out loans next year, he said, including those who choose not to contribute to the work-payment portion of their financial-aid packages but must still meet the now-reduced student contribution.

Beyond federal loans, Yalies who need additional money to cover the costs of college must turn to private loan companies, which experts said have been even harder hit by economic woes than their federal counterparts.

Between one-half to two-thirds of students on financial aid this year have taken out loans, Storlazzi said. Last year, Yale students obtained $4.7 million in loans.

Yale is still vulnerable to the shortcomings of the student-loan market, and administrators have taken into account the market’s fluctuations when recommending lenders to students.

Banks, for example, have been less affected by the current economic downturn than other lenders, said Kevin Bruns, executive director of America’s Student Loan Providers, which represents a variety of major student loan providers. With this in mind, the Student Financial Services office made sure to include more banks on the list of recommended lenders this year, knowing that consumer confidence was stronger in banks than in large lenders, Storlazzi said.

Private loan companies obtain money from investors who purchase the student loans, which students underwrite when they take out the loans. The financial trauma of the sub-prime mortgage crisis, which has shaken the U.S. economy since last summer, undermined the confidence of these private investors in all asset-backed securities, making them less willing to channel their money into private student loans, Bruns said. To compensate, private loan companies have begun to drop special incentives known as “back-end benefits,” he said. The loss of these benefits, such as small refunds for students who pay their bills on time, can increase the cost of student loans, he said.

For students, it will be less of a question of whether or not loans are available than how competitive private loan rates remain.

The loans are still going to be there, but the kind of marketing tactics used by lenders are not as competitive as they used to be financially,” Bruns said.

Luke Swarthout, a higher-education expert at the United States Public Interest Research Group, a non-profit lobbying group, said fluctuations in loan interest rates will only take place in the private-loan market, whereas federal student loans will remain at fixed rates. Swarthout noted that although interest rates for private loans may change due to market-based fluctuations, interest rates for federal loans will remain the same.

“The current market troubles are mostly troubles for current market representatives,” Swarthout said. “[There are] some moderate troubles for lenders but not for students.”

Still, while the weakening economy directly affects lenders rather than students, Bruns pointed out that the loss of benefits is leading to increasing loan costs.

For now, families will simply have to weather the storm, he said.

“It looks like right now its very cloudy,” Bruns said. “There are storm clouds and there is no foreseeable fix on the horizon.”

But Yalies will continue to maintain a better position than their peers — even aside from the new financial-aid policy.

Students attending schools like Yale where few default on their loans will have less difficulty obtaining loans than their peers attending schools with high default rates, Bruns said.

“It’s not impossible that a student at Yale is having problems getting a private loan, but it’s probably rare,” he said. “If it ever got to a point where lenders were not even willing to make loans at schools like [Yale and other Ivy Leagues], that would certainly indicate a very serious problem.”

Bruns said he expects Congress to rectify difficulties in the student loan market via legislation that alters the interest rate before any families are unable to obtain student loans.

Ultimately, Storlazzi and Bruns each recommended that all students in search of loans compare their options and work closely with financial-aid officers.

Comments

  • An arch parent

    How about professional school students? They need help too!