Student lending industry changes as college costs rise
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By JEAN ORTIZ/Lincoln Journal Star
The evolution has happened, not surprisingly, right along with the rise of college costs.
The student lending industry has become more important than ever for families financing college educations.
The growing dependence of students on lenders over the last decade has given way to greater scrutiny of the $85-billion-a-year industry, leaving watchdogs -- who say they are looking out for the interests of students -- to call for reforms.
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The higher education lending industry has grown dramatically since the inception of the federal student loan program in the 1960s, said Robert Shireman, founder and president of The Institute for College Access and Success. The nonprofit group declares a mission of making college affordable and accessible, while Shireman is known as an outspoken critic of the student-loan industry.
Four decades ago, the federal government was begging lenders to enter the student loan market, he said.
Now the competition is fierce.
Lenders, including Sallie Mae and Lincoln-based Nelnet, are offering college planning services, savings programs, career preparation services and other tools to sell to future students, current students and graduates.
They are rolling out multiple Web sites, reaching out to parents, as well, and even putting out their products in Spanish in an era of diversifying demographics.
Lenders say their diversification has been a natural evolution -- purely a response to the changing needs of students and their families.
But Shireman believes differently. It’s a business move, purely designed to generate more earnings, and they have a captive clientele ready and willing to hear them out, he said.
“The student loan business has been their cake and they’ve been adding more icing,” he said.
Lending these days goes beyond the federal program, said Justin Draeger, a spokesman with the National Association of Student Financial Aid Administrators.
The take-off of private loans, sometimes called alternative loans, is arguably one of the biggest changes within the industry in recent years, he said.
Private loans are based not on the borrower’s need, but on a credit rating, and can come with higher costs and fewer protections, compared with their low-interest federal loan counterparts.
Private loans are growing faster than any type of student aid or resource, driven by rising educational costs and students’ inability to survive on federal loans alone, Draeger said.
According to the College Board, private student loans during the 2005-06 academic year totaled more than $17 billion and have grown at an annual average rate of 27 percent since 2000-2001 after adjusting for inflation.
That borrowing shift isn’t the only significant change.
Shireman also points to the early 1990s when the Clinton Administration proposed replacing the federally-guaranteed student loan program -- one that is dependent on private lenders -- with a direct student loan program in which students borrow directly from the government. The reason? To cut out the middlemen who profit from government subsidies.
But the movement lost steam when the next Congress moved in, leaving colleges to choose one program or the other. Today about a quarter of all loans are directly from the government, the rest within the confines of the federally-guaranteed program, Shireman said.
Some say that is what led to the current scandals, Shireman said, as lenders have tried to sway colleges to go with a guaranteed program.
The controversy arose in the last year with New York Attorney General Andrew Cuomo leading an investigation into what he has called kickback schemes that benefit lenders and their partners -- schools and alumni groups among them -- at the expense of students.
Cuomo said his investigation has found that many colleges have established questionable “preferred lender” lists and entered into revenue-sharing and other financial arrangements with those lenders.
Though not necessarily illegal, such arrangements are deceptive and anticompetitive, Cuomo has said.
The debate and calls for reform have been beneficial, said Nelnet President Jeff Noordhoek.
The probe has led student lenders to adopt codes of conduct that lay out new standards for disclosure and transparency.
Noordhoek is proud of Nelnet’s code of conduct, which appears prominently on the company’s Web site.
“I think it’s part of the solution,” he said.
Broadcasting their intentions when it comes to operating their business is important, but there needs to be continuing evolution -- one that keeps students’ interests foremost, he said.
The ultra-competitive market is partially to blame for the controversy, Draeger said. It has tempted some loan providers to step outside of the box to generate business.
While the national association Draeger represents cheers efforts to impose greater transparency within the industry, there is another solution he sees: Increase federal aid and keep students within federal loan limits. Decrease dependence on private loans.
Federal officials have responded to rising costs by adjusting limits within the Pell Grant and Stafford Loan Program.
A Pell Grant maximum annual award increased from $4,050 to $4,310, effective for the 2007-08 school year.
The Stafford Loan Program increased the maximum amount a dependent freshman student can borrow from $2,625 to $3,500. Dependent sophomores, who currently can borrow as much as $3,500, will be able to borrow as much as $4,500 beginning this fall. Dependent juniors and seniors will be capped at $5,500 each year.
As for the future of the student loan industry, it’s a bit up in the air given the uncertainty of pending legislation, Noordhoek said.
Among the education items up for renewal before Congress is the Higher Education Act -- regarded by those in higher education circles as a key vehicle to bring about reforms on a broad range of issues, and lending is just one of them.
Giving borrowers choices, creating healthy competition, lowering the costs to taxpayers and creating greater access to college are all points Nelnet hopes are covered in whatever changes go through, Noordhoek said.
The debate may not be as friendly today as lenders may like, but Noordhoek said he hopes Congress ultimately will do what’s right for students.
“I have confidence that rational minds will prevail,” he said.
Reach Jean Ortiz at 473-7107 or jortiz@journalstar.com
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