Commentary by the Rev. Dennis H. Holtschneider, C.M., in the Chronicle of Higher Education
May 2, 2008
Saturday nights are prime time on a university president's social circuit, so it was an unexpected pleasure to be home on a weekend recently, watching our men's basketball team get a big win on national television. Even more unexpected, though, was a commercial that aired during the game, offering student loans to young potential borrowers.
It was jarring, like the first time a personal-injury lawyer beamed into my living room pitching his services, or an on-screen stranger suggested that I ask my doctor if a brand-name drug was right for me.
The student-loan industry seems to have broken new ground, which raises a red flag after the recent investigation of the private-loan industry by Andrew M. Cuomo, New York State's attorney general. Last June, The Chronicle reported that in Cuomo's testimony before Congress, he compared the industry to the Wild West, characterizing it as a bastion of bad practices. Exacerbating the situation, he contended, was the fact that agencies charged with protecting borrowers had failed to halt deceptive marketing and other practices detrimental to students' pocketbooks.
Those ads are particularly disturbing given the current economic climate, in which students may find themselves seeking new sources of loans. In February, Michigan State University announced that it was canceling its private-loan program because fallouts from the past year's mortgage crisis had begun to affect the student-loan trade. The Pennsylvania Higher Education Assistance Agency followed suit. In late March, almost half of the 315 private institutions that responded to a survey by the National Association of Independent Colleges and Universities had heard from lenders that loans will become harder for students to acquire; 43 percent had heard that one or more of their lenders had already stopped offering private loans. The Wall Street Journal reported in February that buyers are backing off purchasing debt, and recent reports in The Chronicle suggest that officials in the student-loan industry aren't surprised. They saw the lethal mix brewing last fall, when the number of mortgage defaults increased as Congress reduced federal subsidies paid to student-loan companies.
Although Cuomo's investigation also exposed a number of colleges whose staff members had received personal benefits from lenders on the colleges' "preferred" lists, only a small number of colleges were involved — and many that did have undisclosed revenue-sharing agreements had put the money back into programs that benefited students. Most colleges have students' best interests at heart when counseling them about paying for their education. Marketing loans directly to students cuts the college out of the transaction and leaves students at the mercy of aggressive lenders. We must do something about it.
At a time when Americans' savings rates are dismal, families are losing their homes to foreclosure, and credit-card balances are higher than many students and adults can afford, I have serious concerns about whether college students are financially savvy enough to distinguish a good lending arrangement from a bad one. Furthermore, many students do not have parents or other adults to help them navigate one of the largest financial investments they will ever make.
With regulators abdicating their responsibilities, parents not always available or able to counsel their sons and daughters, and colleges getting cut out of the picture, what should a student who's short on tuition money do?
I put the question to Paula Luff, chief financial-aid officer at DePaul University (where I am president). Luff is on the executive council of the National Direct Student Loan Coalition, which visits Washington quarterly to meet with members of Congress regarding direct-loan issues. In terms of loan volume, DePaul is the nation's largest private university in the federal direct-loan program.
She told me that students need to understand exactly what they are getting into before they sign on the dotted line. "Private educational loans require borrowers to be creditworthy or have a creditworthy co-signer to be eligible for those funds," she said. Private loans typically have a tiered interest-rate structure — the better the borrower's credit, the better the rate. Students must recognize that the opposite is true as well: The lower their credit rating, the more they will pay in the long run.
The company I saw advertising on ESPN Classic markets student loans valued at up to $40,000 per year, with the promise of no payments until after graduation. The fact that students will accrue interest on those loans before graduation usually appears in fine print, Luff noted. While that particular company's Web site illustrates the difference in interest due for students choosing to defer payment versus those who pay as they go, the sample repayment options and interest rates displayed usually apply only to students with stellar credit. Most student borrowers with average or poor credit pay more.
Claims from other companies like the following two, which I saw on the Internet, also send confusing messages: "Alternative, or private, student loans are funded by a private financial institution and are not subject to federal guidelines." Such language implies, falsely, that loans that are not beholden to federal guidelines are in some way better. "With a strong co-signer, the likelihood of a fast approval and a check mailed to you in as little as five business days goes way up — even if you, personally, don't have an established credit history and you've had credit problems in the past." Here the emphasis is on the ease of getting the loan rather than the reality of paying it off, which may be even more difficult for borrowers who have already had credit problems. Students must understand that a loan default can haunt them for years.
As a university president, I also must ask: What can colleges do for students who are facing this treacherous landscape? Just because students can take out private loans without our involvement doesn't mean we should stand by and hope they make the best decisions for themselves. To help them get a fair deal, we must lay a foundation of knowledge. Colleges need to:
- Enhance counseling in financial-aid departments, making special efforts to educate students about how they can fill financial gaps.
- Provide tip sheets and FAQ's to students and their parents about navigating the private-lending environment successfully.
- Create or expand "financial fitness" programs to pump up students' financial-planning skills and improve money management through financial-literacy initiatives and workshops in which students can deal with their personal financial affairs, including credit-card debt.
- Engage academic and faculty advisers who understand the tightly intertwined nature of students' academic, career, and financial planning.
- Limit tuition increases for sophomores, juniors, and seniors so they don't drop out for financial reasons and can make long-range plans for financing their education, rather than scrambling at the last moment to secure additional loans when tuition rises.
- Advocate strong oversight of the student-loan industry and colleges' participation in it.
Just as legal and pharmaceutical advertising is here to stay, I suspect we haven't seen the last of halftime ads for student loans. Colleges cannot allow ill-prepared students to go it alone when shopping for loans in an industry that is hungry to find new borrowers to replace those it exploited in the home-lending debacle. We have seen private lenders' "lend now, worry later" approach, and it won't serve college students any better than it did home buyers. Colleges can take the upper hand by acting fast to inform students about the risks of direct-to-consumer student loans.