College Aid Director Discusses Student Loan Woes
MICHELE NORRIS, host:
It is the season when college acceptance letters are landing in mailboxes and that means it's also the season when parents worry about fat tuition bills.
This week, that anxiety may have risen a few notches when Bank of America announced it was getting out of the private student loan business, and Citigroup has said it will stop issuing some loans.
This news has further jolted a college loan market that was already experiencing chaos. Yesterday, the House passed a bill to make sure there's sufficient money available for student loans. For families trying to pay for college, this landscape can be pretty confusing.
Bill Spiers is the director of financial aid at Tallahassee Community College and he told me what's causing this trouble.
Mr. BILL SPIERS (Director, Financial Aid, Tallahassee Community College): The problem that we're faced with in the student lending market is the fact that the subprime crisis has crept into student loans.
Student loans are traditionally less secure, in some people's eyes, paper, whereas they're really a very secure document and that they're guaranteed by the Federal Government, unlike your commercial paper. And so, when the subprime situation hit, the availability of funds basically dried up for many of the student lenders. And the amounts that they had to pay to borrow money just went through the roof.
NORRIS: Well, for years, student loans have been among the easiest loans that one could secure. Even if you had black marks on your credit history, you're able to secure a student loan at a fairly good rate. Are those days over?
Mr. SPIERS: No. As a matter of fact, you'll still be able to secure the federal insured student loans. There are actions within the Department of Education to ensure that every student has access to the student loans. And if they're not available through the Federal Family Education Loan Program, then there is the direct lending program.
The loans that are going to be the most difficult to obtain, at this point, are the private loans that families borrowed to fill in what I would refer to as the gap. Parents will still be able to use the Federal Plus Loan Program, but the parents are borrowing instead of the student.
NORRIS: And for the parents and the students who are borrowing, what are the primary differences between the private loans that are available and these government-backed loans?
Mr. SPIERS: One is - the primary difference is the interest rate. You suddenly shoot up from 6.88 percent to an amount that's determined by credit worthiness. And many of the banks…
NORRIS: In the case of the private loans?
Mr. SPIERS: In the case of the private loans are going on credit worthiness, whereas the federal loans are based on demonstrated need. But again, we always need to stress that loans are going to be available, it's just that students should start earlier, looking for the available funds.
And some of the lenders that they thought they may be able to use could leave the market place before they begin classes in the fall. One of the problems we're faced with, right now, is there's several lenders that are not loaning to students at community colleges because they consider them higher risk paper -even in the federal program.
NORRIS: Is this likely to continue? More than 50 banks have cut out or scaled back programs. If you're in the process of applying for financial aid, looking at lenders, how do you assess whether they're likely to be in business in the future?
Mr. SPIERS: The best thing to do is to contact the school you're attending to see which lenders they're working with at that time. Remember that the federal rates are the same regardless of lenders. You can compare benefits, but most of those benefits are going away.
So what you need to ensure is that the school you're attending has a lender that they're working with - or lenders - because they need at least three that you know you can get a loan from. So your school is your best source of information.
NORRIS: Is there any kind of ranking of these firms or these lending institutions if you're looking at these, as a family, right now. How do you know - how do you know of if they're solvent?
Mr. SPIERS: Right now, you really do not. I was on a conference call today with a very large organization and we were looking at their profitability. It was a conference call, because they were providing information to schools about what's going on within their organization. And right now they're operating in the red in the program - and they were telling us we have to turn this around and make our company profitable again or we don't know where we'll have to go.
Again, it's all hinging on action by the secretary of education and the secretary of treasury, and that's a short term fix. Then the long term fix has to be in the Congress, where they need to look at what they've allowed the lenders to make on the loans to see if that needs to be modified.
NORRIS: Mr. Spiers, thanks so much for your time.
Mr. SPIERS: Thank you.
NORRIS: Bill Spiers is the director of financial aid at Tallahassee Community College, that's in Florida.