Univ. bashes loan plan

The Obama administration’s recent education budget proposal intends to make college an affordable reality for American students. But Director of Student Financial Services Caesar Storlazzi criticized the plan in an interview Monday, saying parts of the proposal could create problems for students at Yale.

The proposal’s most controversial point calls for the elimination of private loans in July 2010, requiring college students instead to borrow directly from the federal government. Yale — unlike some of its peer schools, such as Harvard and Brown universities — currently offers loans through private companies. The Obama administration estimates that the switch will save the government $94 billion over 10 years. But if the proposal is approved, Storlazzi argued, students would have to forego what he dubbed higher-quality service from private lenders, though he said the availability of loans would not likely be impacted.

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“I don’t like the idea of the federal government running the entire loan program,” he said. “I don’t think the infrastructure is there to handle this smoothly.”

The proposal — which is part of Obama’s federal budget plan — passed the House of Representatives Budget Committee last Thursday and will be up for a vote by Congress this week.

Storlazzi said he is most concerned that there might be a “hiccup” in service during the transition period when all student loans are first made exclusively through the government.

Currently, about 10 percent of Yale undergraduates take out some form of student loans, Storlazzi said. Due largely to improvements to Yale’s financial aid program, this figure has been declining in recent years in response to improvements in Yale’s financial aid program, he said, noting that the figure peaked for the class of 2000, in which 49 percent of students had borrowed at some point in their college careers.

Storlazzi said graduate students will be most affected by the switch to government direct loans, since they borrow more money on average than undergraduates. Still, he said, the proposal would not adversely affect the availability of graduate student loans.

Storlazzi is not alone in his apprehensions about the switch to direct federal loans. Kevin Bruns, executive director of America’s Student Loan Providers, said the program would create a monopoly on student loans.

“The benefits of competition will be lost,” Bruns said. “There is no telling what will happen to the quality of service in the direct loan program. Many people agree that having two student loan programs keeps them doing the best job that they can.”

In the past, the competition among student loan providers offered unique benefit programs to entice students to borrow from them, but many such programs have disappeared in recent years as federal subsidies for offering certain types of student loans disappeared, Storlazzi said.

One element of Obama’s proposal calls for a guaranteed increase in funding for need-based Pell grants, which are provided by the government to low-income college students. While this change would save the University money, it would not help Yale undergraduates, Storlazzi said.

Yale meets all student financial need with grant funding, but if a student receives a Pell grant or other outside scholarships, the University subtracts that much grant funding from the total aid package it would offer.

And so the only students who will be impacted by the increases in Pell grant funding are those who receive Pell grants but do not need Yale financial aid, as is the case for some students with divorced parents, Storlazzi said.

If the Obama administration’s proposal passes, the maximum Pell grant for the 2010-’11 academic year will increase to $5,550, compared to the $5,350 maximum Pell grant for the 2009-’10 academic year.

The Obama administration has argued that the increase in Pell grant funding will be made possible by originating all student loans on a federal level, saving the government money, Bruns said. But both he and Storlazzi said an increase in Pell grants should be done on its own accord.

The Obama administration is also likely to save less money than estimates indicate with the proposed switch to direct government loans, said Bruns and Mark Kantrowitz, a college financial aid expert and publisher of FinAid.org.

Kantrowitz said the government would save money through the federal student loan program by transferring some administrative responsibilities to university staff members. Storlazzi said Yale’s Student Financial Services would need to do some restructuring to fulfill these new responsibilities, but he added that an all-direct loan program will make some tasks easier, such as sending back loans from students who no longer need them.

The Obama budget proposal will have some visible advantages for Yale students and their families, including a proposed $2,500 tax credit for parents with students in college.

Other organizations have offered praise for the Obama proposal, most notably the Institute of College Access & Success, whose acting president, Lauren Asher, issued a statement in praise of all pieces of the proposal, including the shift to exclusively government-based loans.

Comments

  • Yale 08

    This is a horrible idea.

    Government education loans are the #1 reason for the EXPLOSION in college tuition over the past 2 decades.

    It has had an incredibly inflationary effect. It's so textbook, like Econ 101- more cheaps dollars chasing after limited goods (college degrees).

    Cut out the government, and you will see students more carefully weighing whether college is truly their best option, and you will see a readjustment in tuition costs.

  • hmmm

    Great, big government is going to block my loans. Yes we can rot in a socialist paradise!

  • Anonymous

    Private loans ought to go. The government-sponsored private loan system has been inefficient and wasteful, and features higher interest rates than federal loans anyway. Yale students won't miss private lenders and their "better service," and taxpayers will get a needed break as well. Win-win.

  • p.s.

    The graphic attached to this article says that only 10 percent of Yale students currently have student loans? There's no way that's right…

  • T.R

    More money for the "Educational Industrial Complex." The only prices that rise faster then gas prices are tuition costs. This administration spends like Druken congressmen. (drunken sailors are eventully stopped by the Shore Patrol)Sallie Mae will end up in the same boat with its siblings Fannie and Freddie the taxpayers will lose the friends of Barak, Barney and Chris will get richer the schools will bloat with easy money and in the end the taxpayers will get a minus return.

  • Veritas 08

    TR is correct.

    Mortgages and Student Loans were previously low risk.

    Mortgages (pre-securitization) were underwritten by local bankers with a knowledge of the housing/employment market.

    Student loans for college degrees previously guaranteed a massive payoff for the recipients.

    Both of these standards no longer hold.

    Mortgages are just another volatile piece of debt.

    Student loans are now burdens carried to your grave, weighing down your credit score, and most college degrees aren't worth the tuition. (Yale/Ivies excepted)

    Sallie Mae will fail.

    We will bail them out.

    Tuition costs will continue to rise as a symptom of inflation.

    Private loans were the best way to go.

    The government has soiled too much already.

  • SM '08

    As a recent Yale graduate with student loans, I can say that there is nothing cutting edge about private loan servicing. With universities selecting "preferred providers," there is often little choice for students to begin with.

    Case in point: The servicer of my Yale loans required me to mail them a handwritten form to set up automatic deductions from my bank account. This should easily be doable online, but the lender has not invested in this technology because they are protected from competition.

    Because students are often already restricted to a small set of lenders, lenders have little incentive to offer great service (as opposed to say,savings banks). Student lenders have poor service and antiquated technology because they control mini-monopolies with individual colleges and state university systems.

    Federal servicing of loans is a win-win for everyone.

  • jeff g

    Storlazzi and Burns, the dynamic duo, they are afraid that service may be compromised?They say competition is needed, since when is two forced options competition? The only thing that will be compromised is the perks each player receives!

  • mc 00, hms 07

    my med school was involved in the direct loans program from the fed govt. their website is excellent, user friendly, and responsive. if anyone in fin aid is an aggressive sallie mae promoter i'd wonder about a conflict of interest.

  • shame on Yale, and on the YDN

    I can't believe Yale is still participating in the private student loan racket. The "service" is a sham, and many journalists have exposed the private student loan industry as a racket that operates by taking subsidies from the government in the millions, then spending that money marketing their loans, which are no better than the government's own, to students and (especially) to administrators, who can steer students their way.

    Also, this YDN story was very one-sided. Only in the last paragraph do you mention anybody in favor of Obama's proposal, and you don't even quote them? Please.

  • T.R

    Its not about who makes the loans its the loan money that has caused/allowed tuitions to go through the roof. With the U.S Mint and a government that can't say no! There is no market balance to bring down the price.

  • What you should know

    Administering student loans from one source can detect and analyze data on abuses, especially patterns of institutional exploitation of vulnerable low-income students with few family resources.

  • Anonymous

    It's astounding that some Yalies offer enthusiastic and unquestioning support for Obama's plan to create one of the largest government monopolies in history. This is an $80 billion gamble that without any competition the Direct Loan program will continue to offer satisfactory service and invest in innovation.

    Few programs run by government contractors, which the DL is one, are centers of innovation and consumer convenience. Many experts believe the only reason the direct loan program is half-way decent is competition in the form of the federal guaranteed student loan program existed.

    Finally, reports of the lender-based program's waste, inefficiency and corruption are greatly exagarated, usually by direct loan advocates attempting to demonize lenders and financial aid offices and cut off debate.

    It works, of course. You don't need a Yale degree to figure that out.