Changing federal regulations and a collapse in the bond market have caused many national associations to pull out of college loan programs, limiting resources for students. The national woes have trickled down to Montana, where the state’s nonprofit lender cut staff and loan benefits in recent months, but is assuring borrowers that funding is secure for at least the next academic year.
It’s difficult to know what the future holds, however, for the Montana Higher Education Student Assistance Corp. and its business manager, the Student Assistance Foundation, or Montana college students. Officials at some area colleges and the state board of regents have expressed concern, as the future of the student loan industry remains unknown.
In mid-April, SAF reduced “borrower benefits” by $3 million. What that means is that MHESAC will no longer pay the borrower origination fee and default fee on borrowers’ student loans as it has in the past, a 2 percent difference. A student previously received the full amount of their loan, say $15,000 on a $15,000 loan, because MHESAC picked up those extra fees. Now those fees will come off the loan total, leaving students with 2 percent less – $14,700 in the case of the $15,000 loan.
Then, later last month, SAF laid off 23 workers in an attempt to further cut costs and announced it was suspending its federal student loan consolidation program. The loans will continue through the next academic year, though, as the organization has secured $175 million in funding for 2008-2009. SAF president and chief executive Jim Stipcich was not available to comment for this story.
“The small reduction in benefits is primarily the only negative effect on students this fall,” Mick Hanson, director of financial aid at the University of Montana, said. “There is adequate funds for anyone who is qualified and has been admitted to attend college. Those funds may not look exactly like they looked a few years ago, but there will be enough; there’s no reason to panic.”
Others school officials, however, are less confident about future years and say they’re keeping abreast of the situation at SAF. “I don’t think anyone a year ago would’ve imagined we would be in this situation, so it’s difficult, I think, to predict where this may go in the next year,” Cindy Kiefer, Flathead Valley Community College’s director of financial aid, said.
Last week, the Montana Board of Regents voted 5-2 to seek a legislative performance audit of the two financially struggling loan entities, but before that can happen the state attorney general will probably have to decide if it’s legal. The loan nonprofits contend they’re private, not public, entities, but several members of the Board of Regents and the commissioners of education’s staff sit on the MHESAC and SAF boards, blurring the line.
“They’ve taken an aggressive business model that has risks as we’re recognizing in the marketplace right now, and it is clearly time to recognize that those risks are putting this program and its future in jeopardy,” Regent Todd Buchanan said. “To be fair, the services they have provided have been good in the past and I believe the intent of the organization is a fantastic gesture to Montana students, but I fear this business model has put that intent at risk.”
Student loan providers have used auction-rate securities because they allowed the lender to borrow for the long term at short-term interest rates. But, when firms that ran the bidding stopped using their own capital to buy auction-rate bonds that went unsold earlier this year, it left loan companies without the ability to finance. MHESAC’s borrowing costs on its outstanding financings increased by more than $14 million in the past nine months, according to a press release from the company.
Compounding the problems facing the lenders is an overhaul of federal student loan regulations that has tightened returns from the government on guaranteed loans. Government subsidies decreased with the new law, while fees lenders must pay to the U.S. Department of Education increased, causing lenders to make less on each loan they make. MHESAC and SAF have recommended the government provide standby purchase agreements, a resolution the state Board of Regents has signed on to.
Even with the recent cuts, MHESAC and SAF are on better footing than many organizations nationally: At least 45 state agencies, private firms and nonprofit groups – out of 2,000 nationwide – have pulled out of lending through the U.S.-subsidized Federal Family Education Loan Program or private loans since December, according to FinAid.org, a Web site providing financial-aid information.
The crunch could mean students and parents have fewer options to fund college educations, but Hanson says he’s confident the state won’t get to that point.
“The practical point of view from my chair as a financial aid director,” he said, “is that Congress will never let this get to a point where there isn’t money for higher education in this country. It’s too big of an issue.”