While most Yale undergraduates will be celebrating the end of student loans next year, many of their graduate-student counterparts will still be taking out tens of thousands of dollars in loans — a process that tightening credit markets have made even more stressful.
Although graduate- and professional-school students, like undergraduates, will have no difficulty obtaining federal loans, the special incentives, or “borrower benefits,” that often accompany them are slowly eroding away, according to market analysts. This loss adds up to over thousands of dollars in loans, Student Financial Services Director Caesar Storlazzi said, a situation that disproportionately affects professional-school students, whose loans dwarf those of their graduate and undergraduate counterparts.
To address the negative effects of the recent economic downturn — including diminishing benefits and choice among lenders — Storlazzi has formed a “loan think tank” composed of professional-school aid officers and deans.
“We’re not in immediate danger, but we know the landscape is going to change,” Storlazzi said. “We want to think ahead of the curve about these issues, because we don’t know when these markets will turn around.”
The think tank, which will begin meeting in April, plans to release a report in the fall, Storlazzi said.
But while commending Yale for thinking ahead, Luke Swarthout, a higher-education expert at the United States Public Interest Research Group, a non-profit lobbying group, questioned how significant borrower benefits are in the first place.
Although banks often tout these benefits — which include payment of federal fees on behalf of the borrower and small refunds for students who pay their bills on time — when selling students loan packages, some studies have concluded that only a small fraction of students actually receive these benefits, Swarthout said. Because the rewards for on-time loan repayment often vanish if even one repayment is missed, many students do not end up benefiting from the banks’ offers, he said.
“These benefits are largely overstated by banks. Many are conditional and dependent on repayment over time, and students never receive them,” Swarthout said.
Storlazzi said while borrower benefits are certainly less generous than they used to be, the savings for graduate students in particular can be “quite significant” — between $1,000 to $3,000 on a $41,000 Stafford loan, for example — if the student qualifies for the benefits.
Not all graduate students are affected equally by changes in loan benefits, however. While students at the School of Medicine and the School of Management, for example, may take out upwards of $20,000 in loans each year, students at the Graduate School of Arts and Sciences generally get full funding for their studies and do not have to take out loans to cover tuition.
Yale students also often get better benefit offers than students at other schools, Storlazzi said. Banks are generally more confident that Yale students will repay the loans, and they may also hope to win the future business — such as home mortgages — of students likely to be successful later in life, he explained.
Lenders also know that if students have negative borrowing experiences with them, Yale will not include them on the Student Financial Service’s recommended lender lists, Storlazzi said.
Still, there is no doubt that some lenders are cutting back on borrower benefits as federal subsidies for offering certain types of student loans disappear.
Access Group, a nonprofit lender that specializes in graduate-student loans, eliminated its on-time payment incentives for Stafford and Federal Parent PLUS loans last fall when Congress cut subsidies to federal loans, Access Group Vice President of Communications Pat Curry said.
Although the company still pays some federal fees for borrowers — such as the fee on the Stafford loan — and gives an interest rate reduction for automatic debit payments, the group will be reviewing its benefit policies in the coming months and may decide to stop offering such benefits, Curry said.
Schools’ — and students’ — expectations of what borrower benefits will be available have changed dramatically, Storlazzi said.
“A year ago, we wouldn’t consider putting a lender on our list [of recommended lenders] if they didn’t pay the [federal] fees,” Storlazzi said. “That’s not at all the case this year.”
In addition to recent changes to borrower benefits as the credit markets have tightened, some lenders are dropping out entirely, which reduces the number of choices among lenders — another issue that the loan think tank will address, Storlazzi said.
For example, the Graduate Leverage group pulled out of the federal loan program effective April 1, leaving roughly 30 Yale students without a lender, Storlazzi said. Although these students will be able to find other lenders, some nursing students who were expecting a third disbursement of their loans from Graduate Leverage over the summer are scrambling to secure other loans before then, he said.
The think tank will also address concerns about the availability of funds for the Perkins Loan, a loan administered by each school but supplied with money by the federal government, Storlazzi said. Since the government has not made a capital contribution to the national fund for the past five years, he said, the money in the fund is evaporating quickly.
One response from some universities to the recent upheaval in the student loan market has been to switch to the federal government’s direct student-loan program from the lender-based guaranteed loan program — but Yale has no plans to follow these schools, Storlazzi said.
Although “going direct” ensures the availability of loans — although this has not been a problem — and streamlines loan processing by the schools, Yale thinks that the direct loan program benefits the schools but not the students, Storlazzi said. By offering only direct federal loans, Yale would take away students’ ability to choose among lenders and receive borrower benefits, he said.
Only a handful of colleges and universities, including Pennsylvania State and Northeastern universities, have announced plans to switch to the direct loan program, although increasing numbers are exploring the option, Inside Higher Ed reported Wednesday. But if the uncertainty surrounding loans continues, more schools could make the switch in search of stability, according to the article.
While schools and lenders are furiously assessing their options as the credit crisis deepens, many students are unclear about what to do, if anything.
School of Management student Amber Walsh SOM ’09, who took out a $70,000 loan to cover her first year at SOM, said she is crossing her fingers that her lender, Total Higher Education, will both continue to offer loans and maintain her current benefits.
“You’d think that as a business student, I’d be really on top of this loan situation,” Walsh said. “But I’m just at the will of the market at this point. … Even if I don’t get the benefits, that wouldn’t prevent me from finishing my degree. I don’t think we have a lot of negotiation room at this point.”
Aaron Miller SOM ’09 is similarly concerned about borrower benefits — such as a reduction in interest rate if he makes on-time electronic payments on his Bank of America loan — disappearing in the coming months. But Miller said he hopes that interest rates, which have been lowered by the Fed in recent months, will continue to stay low and perhaps offset the loss of the benefits when he applies for another loan this summer.
But not all students are grappling with the problems that come with tens of thousands of dollars in loans. Most doctoral candidates, in fact, are loan-free.
Bobbi Sutherland GRD ’09, chair of the Graduate Student Assembly, said her only loan so far has been a small one to cover a summer language program. The concerns about lenders and borrower benefits have passed most doctoral candidates by, she said.
While the GSA is willing to hold discussions among graduate students about the loan situation, none of the graduate students have brought up any concerns about it, she said.
“It’s not something that’s on our radar screen, because no one has brought it to our attention,” Sutherland said.
Despite the bad news coming from the credit markets, there may be reason for students taking out loans to cheer up: Congress has approved a new income-based loan repayment program effective in 2009. The program will allow students taking relatively low-paying jobs to defer some of the payment on their loans to future years.
Although much of the focus right now is on loan availability and eroding benefits, Swarthout said, this “hugely valuable safety net” is a far more significant change.
“Essentially, if you’re comparing the market conditions versus federal policy changes, the latter are way more profound now,” Swarthout said.
Undergraduates at Yale have a better outlook than their graduate-school peers when it comes to loans: The University announced in January that it would eliminate the need for student loans as part of a new undergraduate financial aid-initiative.