Forces of Change

1
Forces of Change

• VASFAA Conference
• Newport News
• May 20, 2008

2
What Well Cover

• Loan access issue
• Possible solutions, including H.R. 5715
• Reauthorization possibilities

3
Loan Access
4
Loan Access

• NASFAA feels that lenders also have a moral
  responsibility to offer federal student loans to
  all students enrolled in an eligible program,
  regardless of the students situation. As we
  advocate for increased liquidity during this
  credit crunch, we also fully expect lenders not
  to deny students federal loans based on the
  school they attend or any other criteria.
• Dr. Philip Day, President and CEO, NASFAA
• May 9, 2008 Message to NASFAA Members

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Loan Access

• It shouldnt be Congresss job to anticipate
  credit market changes in student loan
  legislation. Instead, we should ensure that
  lenders participating in federal student loan
  programs are able to enjoy a reasonable rate of
  return, and then ensure that there are
  contingency plans in place in the event that
  credit market stresses lead significant numbers
  of lenders to significantly reduce their lending
  activity.
• Congressman George Miller
• Chair, House Education and Labor Committee
• April 29, 2008 Letter to the Wall Street Journal

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Loan Access

• Student lenders are trying to hype the
  current credit crunch to scare Congress into
  providing them additional subsidies and to
  discredit last years hard won higher education
  reform.
• Luke Swarthout
• U.S. Public Interest Research Group
• April 12, 2008 New York Times

7
Loan Access

• Sallie Mae, formally known as SLM Corp,
  posted a first-quarter net loss attributable to
  common shareholders of 132.8 million, or 28
  cents a share, compared with net income of 107
  million, or 26 cents a share, in the same quarter
  last year.
• Reuters News Service, April 16, 2008

8
Loan Access

• Last summer, before a yield cut of 0.55 on
  Stafford Loans, a doubling of the lender paid
  origination fee, and a more than 0.70 rise in
  debt costs, a typical FFEL lender was able to
  earn a net return before taxes of 1.12. That
  return now is approximately a negative 0.4.
• Consumer Bankers Association, April 15, 2008
• Testimony to the Senate Committee on Banking

9
Loan Access

• In July of last year, the average FFEL loan
  provided the lender a 1.28 return on its
  investment. Making one now puts a lender at an
  immediate loss of 0.6, according to one
  investment bank that recently did a study on
  student lender funding costs.
• Wall Street Journal, March 24, 2008

10
Loan Access

• Consider these questions
• Do lenders truly have a moral obligation to make
  loans to all students at all schools, regardless
  of profitability?
• Do lenders have a legal obligation to their
  shareholders that trumps any moral obligation?
• Has Congress done its job as defined by Chairman
  Miller?

11
Loan Access

• Causes have been well-documented
• First primary factor lender revenue cuts
• HERA and CCRAA cuts total approximately 40
  billion over 6 years
• Did Congress cut too much?

12
Loan Access

• Fed Chairman Ben Bernanke, in a letter to
  Senate Banking Committee Chairman Christopher
  Dodd, said recent student loan market problems
  stem from many causes, including cuts made last
  year by Congress in lender subsidies. Congress
  may well wish to revisit the question of whether
  setting hard subsidy levels for loan providers is
  the best approach, Bernanke said in the letter.
• Reuters News Service, May 1, 2008

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Loan Access

• Second primary factor collapse of the market
  for auction rate securities
• Results
• In some cases, the complete inability to raise
  funds used to make student loans
• When available at all, higher costs to fund both
  new loans and loans already made
• Lenders having to resort to other, higher cost
  financing mechanisms

14
Loan Access

• Lender response has varied
• Some leaving the business permanently Either
  FFELP, alternative loans, or both
• Some have suspended participation Typically,
  either FFELP or alternative loans side of
  business
• Others have become more selective in who they
  serve
• Some avoiding schools with predominately
  low-balance loans
• Some avoiding high cohort default rate schools
• Some avoiding schools with low graduation rates
• On the alternative side, requiring higher credit
  scores or co-signers

15
Loan Access

• Why avoid low balance loans?
• Cost to originate is same regardless of balance
• Low balance loans provide lenders smaller revenue
  stream, making it more difficult to recover
  origination costs
• Why avoid schools with low graduation rates?
• Schools typically have higher cohort default
  rates
• Why avoid schools with higher cohort default
  rates?
• Delinquent loans more expensive to service
• Shorter earning period
• Increased costs at default from Congress
  eliminating exceptional performer status and
  increasing risk-sharing

16
Loan Access

• Lender responses have created concerns regarding
  availability of loans
• For many students, loans access
• So whats being done to address these issues?
• Four approaches being taken
• Evaluation of DL capacity
• Planning for ramp up of Lender of Last Resort
  program
• Injecting liquidity into securities market
• Legislation

17
Loan Access

• Can the Direct Loan program serve as a backstop?
• Ms. Spellings, the department secretary, has
  said the direct loan program could double the
  amount of new loans it makes to students, if
  necessary.
• New York Times, April 12, 2008
• Could be viewed as a partial solution
• Could go from current 20 to 40 of loan volume
  if Ms. Spellings is correct
• Has no effect of availability of private loans

18
Loan Access

• Doubts exist regarding EDs capacity to do this
• But education lobbyists doubt that the direct
  loan program, which accounts for 20 percent of
  student loan volume, could scale up rapidly if
  private lenders fled the market. It was simply
  not realistic for the Department of Education to
  quickly ramp up to 50 percent of loan volume,
  Career College Association President Harris
  Miller said.
• The Hill, April 17, 2008
• Consolidation loan experience adds to the doubts
• 1998 shut down of DL Consolidation
• Mini-boom of Consolidation possible in 2008

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Loan Access

• Additional doubts exist regarding schools
  capacity to switch to DL
• Day, of NASFAA, noted that it was not
  exactly easy to switch to direct lending, in
  part because the schools most vulnerable to
  losing access to loans have the least resources
  to devote to the transition.
• The Hill, April 17, 2008
• At best, DL represents only a partial solution

20
Loan Access

• Has created an unfortunate renewal of the FFELP
  versus DL debate
• Both the NY Times and Washington Post have
  renewed longstanding calls for a complete switch
  to DL
• It is not about student loans -- it's about
  access to postsecondary education, which for many
  students unfortunately entails borrowing to pay
  for their education. The government's role
  should not be in support of either the Federal
  Family Education Loan Program or the Direct Loan
  Program, it should be in support of the students
  who require this assistance.
• Brett Lief, President of NCHELP
• May 9, 2008 letter to the NY Times

21
Loan Access

• A lender of last resort (LLR) program could serve
  as another backstop
• LLR could take three forms
• Using existing lenders that agree to make LLR
  loans
• Guarantors would act as lenders using their own
  capital
• Guarantors would act as lenders using capital
  provided by ED and Treasury

22
Loan Access

• Use of existing lenders
• Very limited interest in participating
• Typically limit dollar amount of participation
• Guarantors using own capital to serve as lenders
• Not all guarantors have financial capacity
• Many guarantors have no system to originate loans
• Guarantors using capital provided by ED and
  Treasury
• Again, inability to originate loans
• Unanswered questions regarding borrowing costs
• Newest ED decision loans made with Federal
  funds must be transferred to ED for servicing
  immediately after final disbursement

23
Loan Access

• Congress and ED have taken steps to implement and
  define an LLR program
• ED met with guarantors to discuss LLR issues
• On May 5, ED issued Dear Colleague Letter
  GEN-08-05 describing how LLR would work (15
  pages)
• ED says will be ready by June 1

24
Loan Access

• New LLR provisions are contained in H.R. 5715
• Originally applied only to subsidized Stafford
  now includes sub and unsub Stafford and PLUS
• LLR-designated schools
• ED can require schools to demonstrate difficulty
  in securing lenders
• Secretary will designate school as an LLR school
• Authority to do so expires June 30, 2009
• Appears that all loans at such schools will be
  LLR, even if some students and parents can secure
  non-LLR loans
• All LLR loans must be made at maximum interest
  rate and fees (origination and default fees)
• Clarifies that ED has authority to advance funds
  to guarantors serving as LLR lenders

25
Loan Access

• Most participants are hopeful LLR will not have
  to be used
• We have also worked to ensure that the original
  intent of the LLR program is preserved, ensuring
  that these LLR loans are provided only as a true
  last resort.
• DCL GEN-08-05

26
Loan Access

• Addressing liquidity issues in the securities
  market
• Multiple ways of accomplishing this
• Changing some securities market practices
• Creating new secondary markets for student loan
  securities
• Having ED serve as a secondary market of last
  resort

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Loan Access

• Changing security market practices
• On May 2, Federal Reserve took action to inject
  liquidity into student loan market
• Term Securities Lending Facility now will accept
  AAA-rated student loan securities as collateral
• Coincidental? First successful student loan
  securities auction in months took place on the
  same day

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Loan Access

• Creating new secondary markets
• Two proposed bills of note
• H.R. 5723 Rep. Kanjorski
• S. 2847 Sen. Kerry
• Bills would authorize lenders to borrow from
  Federal Home Loan Bank using student loans as
  collateral
• Would allow lenders to raise funds to use to make
  new loans
• NASFAA sent letter yesterday in support of
  similar legislation

29
Loan Access

• ED as secondary market of last resort
• H.R. 5715 gives ED authority to purchase student
  loans
• Applies to sub and unsub Stafford and PLUS
• Loans must be made between 10/1/2003 and
  07/1/2009
• Secretary must determine there is an inadequate
  availability of loan capital to meet the demand
• Purchase must result in no net cost to the
  Federal Government, including servicing costs
• Proceeds of purchases must be used
• To ensure continued participation of lender in
  FFELP
• To originate new loans
• ED can contract with selling lender to continue
  servicing the loans
• Authority created in Part D of HEA Treated as
  DL loans?

30
Loan Access

• ED to announce terms of purchase today
• Big question will price allow for recovery of
  cost of originating loans?
• The terms are not expected to be favorable to
  lenders, fueling speculation that many loan
  companiesincluding Sallie Mae, the nation's
  largest student-loan provider may respond by
  announcing their withdrawal from the
  government-subsidized student-loan system.
• The Chronicle, May 20, 2008

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Loan Access

• Additional legislative remedies
• H.R. 5715 addresses the loan access issue in
  several additional ways

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H.R 5715 Other Provisions
33
H.R. 5715

• H.R. 5715 addresses the loan access issue in
  several additional ways
• Increases certain loan limits
• Creates a PLUS grace period
• Adds new PLUS credit extenuating circumstances
• Just for good measure, this bill also makes some
  significant changes to ACG-SMART Grants

34
H.R. 5715

• Increased loan limits
• Unsubsidized Stafford only
• Undergraduate students only
• Loans first disbursed on/after July 1, 2008
• Effectively raises loan limits by 2,000 for
  every undergraduate Stafford borrower
• Also raises aggregate limits for all
  undergraduate Stafford borrower
• More Stafford less in alternative loan
  borrowing

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H.R. 5715

• Three types of undergraduate borrowers
• Dependent students
• Dependent students whose parents are unable to
  borrow under PLUS
• Independent students
• Limits differ based upon category of student

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H.R. 5715

• Dependent students
• Aggregate 31,000 with maximum 23,000 in
  subsidized Stafford

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H.R. 5715

• Dependent students whose parents cannot borrow
  PLUS and independent students
• Aggregate 57,500 with maximum 23,000 in
  subsidized Stafford

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H.R. 5715

• Will you have to repackage?
• Think about Box 11 on the MPN Loan Amount
  Requested
• Borrower requests total amount of eligibility
• Dependent students do not receive the extra
  2,000 twice once for being dependent and once
  for parents not being able to borrow under PLUS

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H.R. 5715

• PLUS grace period
• Applies to Parent PLUS only
• Loans with a first disbursement on/after July 1,
  2008
• Would allow for a 6-month grace period following
  the date the dependent student is no longer
  enrolled at least half-time
• Available if agreed upon by a parent borrower
• Repayment implication Parents with PLUS loans,
  some with grace periods and others without
• Many unanswered operational issues
• Major systems changes to accommodate

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H.R. 5715

• New PLUS credit extenuating circumstances
• Allows, but does not require, lenders to consider
  additional factors in evaluating adverse credit
• Lenders can make PLUS loans if borrower is
• 180 days or less delinquent on mortgage (primary
  residence only) or medical bills
• Borrower is no more than 89 days delinquent on
  other bills
• Delinquency occurred between January 1, 2007 and
  December 31, 2009

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H.R. 5715

• Has implications beyond December 31, 2009
• Applies to when delinquency occurs, not when
  credit decision is made
• Credit decisions in 2010 and later could be
  affected
• Some outstanding questions remain
• Applies to Grad PLUS? Law is not clear
• How will lender determine if delinquent mortgage
  is on primary residence?
• Applies to 2nd, 3rd, 4th mortgages? Probably

42
H.R. 5715

• ACG-SMART Grant Changes
• Effective date not 100 clear
• Deleted all references to academic year
• Added eligibility for a fifth year for
  undergraduate programs that are designed to be
  that length
• Deleted full-time enrollment requirement Now
  can receive if enrolled at least half-time
• Deleted requirement that recipient be a U.S.
  citizen
• Adds eligibility for students enrolled in 1-2
  year certificate programs
• Adds eligibility for certain schools where
  students are not allowed to declare majors
• Allows State officials to designate certain high
  school programs as rigorous without EDs approval

43
Higher Education Act Reauthorization
44
HEA Reauthorization

• Should have been done in 2003
• Eleven extensions reauthorized the HEA through
  April 30, 2008
• Senate passed a twelfth extension through May 31,
  but House did not
• Technically, HEA expired
• May 13, Congress passed a twelfth extension
  through May 31

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HEA Reauthorization

• Both the Senate and House passed reauthorization
  bills months ago
• S. 1642 passed (95 0) on July 24, 2007
• H.R. 4137 passed (354 58) on February 7, 2008
• Committee staff have been meeting to iron out
  differences in House and Senate versions
• Progress was sidetracked due to attention to
  access issue
• Several publications are reporting that a draft
  bill is being circulated

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HEA Reauthorization

• Contentious issues
• State maintenance of effort provision
• Textbook disclosures with course schedules
• Truth in tuition estimates
• Extending federal aid for graduate programs to
  additional schools
• Once committee staff have resolved major
  differences, Conference committee will be
  appointed
• Conference committee will
• Resolve remaining issues
• Produce a single revised bill

47
HEA Reauthorization

• Reconciled bill will have to go back to House and
  Senate for another vote
• Once passed, to President to sign
• Congress is pushing to complete by Memorial Day
  recess
• Why such a push?
• Potential Democrat in White House in 2009
• Special election results point to Democratic
  landslide in House and Senate races
• Perhaps an accomplishment incumbents can mention
• Perhaps recognition that passage after Memorial
  Day is less likely

48
HEA Reauthorization

• Potential stumbling blocks
• Sheer amount of time Memorial Day recess begins
  this Friday
• Other important legislation taking priority -2009
  budget resolution and war funding bills
• Kennedy illness
• Consensus opinion now or not until 2009

49
HEA Reauthorization

• Several Congressional aides and college
  lobbyists continue to believe such a schedule is
  untenable, and to worry that if lawmakers stick
  to it and continue to make most of the
  legislations provisions effective immediately -
  the end result is unlikely to be pretty.
• Inside Higher Education, May 13, 2008

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Questions?Comments?Complaints?

• Mike Hawkes
• mhawkes_at_ecmc.org
• 804.267.7101