Higher Ed Watch

For years, expensive private colleges have pretty much been able to raise their prices without having to worry about scaring off students -- as the widespread availability of easy credit made it possible for students and their families view these schools as affordable. Lenders have been all too willing to ensure that these students had all the money they needed, through the federal and private loan programs, to be able to afford to attend.

For these high-cost colleges, particularly non-elite ones that heavily rely on tuition to cover operating expenses, the lenders' eagerness to provide high cost private loans to financially needy students at their institutions presented a win-win situation. It allowed them to free up their institutional aid dollars to recruit "more attractive" students (merit scholars, etc.). And, for the most part, the schools had the luxury of not having to worry about the difficulties many of their students would encounter repaying these loans.

But now with all the turmoil in the financial markets, and private loan default rates on the rise, these policies are coming back to bite high-priced schools. That much is clear from a survey that the National Association of Independent Colleges and Universities (NAICU) released on Tuesday. The group, which lobbies on behalf of private colleges, questioned its members about the effect the credit crunch is having on student loan availability at their institutions.

Few of the 504 colleges that responded reported having any problems associated with federal loans. Many, however, said that they had run into trouble obtaining private loans for at least some of their students. This is because most lenders are no longer willing to waive or substantially loosen their credit requirements to provide unsecured debt to high-risk students -- a once commonplace practice that helped fuel the growth of private loan borrowing on these campuses.

The Bush administration and lawmakers from both political parties are continuing to look for ways to help struggling student loan providers. While students haven't experienced any problems obtaining federal loans, lenders are still having trouble coping with the turmoil in the financial markets.

Before providing any additional help, however, policymakers should take a step back and consider how we got into this mess. For years, student loan providers have relied on the asset-backed securities market to finance their loans. That market has become dysfunctional and now most lenders are only able to continue making Federal Family Education Loans with liquidity provided by the government.

The student loan industry is not completely blameless for the breakdown of investor confidence in student loans. While the greatest damage was done by mortgage lenders securitizing faulty subprime mortgage loans, student loan companies dumped plenty of high-risk private loans onto the marketplace (sometimes bundled with safer federal loans), knowing full well that some of this debt was likely to go into default.

While many lenders have gratefully accepted the government's help in financing their loans, they still don't want to shoulder any responsibility for their actions. Instead, they have identified a convenient scapegoat for their problems -- the sharp cuts Congress made to lender subsidies last year. As we've noted before, the loan industry has repeatedly tried to use the panic created by the credit crunch to pressure lawmakers into revisiting the subsidy cuts.

Last week, Harris Miller, the president of the Career College Association (CCA), made an unusual request of the U.S. Department of Education. He asked the agency to bring only his group's members to the table when it starts negotiating changes to regulations designed to protect students from unscrupulous trade schools.

"Allowing others without a direct connection to this issue to participate is like allowing non-pilots to help fly the plane," Miller stated in testimony he delivered at a public hearing the Department held on potential rule changes. "They may have a point of view, they may find the proceedings interesting, but giving them a seat at the controls would simply be wrong for the millions of students depending on career education as the ‘flight path' to a better life."

Miller's gambit is just the latest in a fierce campaign CCA has waged over the last 15 years to kill the "90-10 rule," a key consumer provision in the Higher Education Act. The rule requires for-profit colleges to receive at least 10 percent of their revenue from sources other than federal student aid in order to participate in the government's financial aid programs.

Congress took a small step this summer to try to prevent students from taking on unnecessary private loan debt. But without careful implementation by the U.S. Department of Education, this effort may end up being little more than another toothless measure.

At issue is a provision that was included in the recent reauthorization of the Higher Education Act that aims to encourage students to seek out the advice of their financial aid administrators before taking on expensive private student loan debt. The lawmakers were responding to reports that lenders' aggressive marketing practices were pushing a substantial number of students to take on expensive private loans before exhausting their eligibility for safe, cheaper federal student loans.

We share this concern. Last year, the New America Foundation joined a coalition of student and consumer advocacy groups that called on Congress to require colleges to certify a student's need for private loans before that individual could receive them. As we've noted, financial aid administrators at Barnard College and Colorado State University have shown the benefits of this approach. Targeted counseling prior to certification has helped students at these schools make better-informed borrowing decisions that will save them thousands of dollars over the lives of their loans.