Families Scramble As College Loans Fall Short

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The Massachusetts Educational Financing Authority has announced that it will stop lending out private student loans. Paul Basken, a senior reporter for The Chronicle of Higher Education, explains what this move could mean for the future of student loan programs.


Today, the Massachusetts Educational Financing Authority, a major nonprofit lender, announced on Monday that it won't be able to loan money to college students this fall. That means some 40,000 families in the Bay State will have to hustle to find other loan options. Over the past 10 months, Congress has passed legislation to overhaul the student-loan industry, but families and many lenders are still feeling the pinch. Today we'll take a look at how student financing is coping, or not, in this slow economy.

So, parents and college students, as the start of the fall semester approaches, how will you fund this year's tuition? Our number here is 800-989-8255. Our email address is Or you can send a comment to our blog. It's at And joining us now is Paul Basken. He is a senior reporter for the Chronicle of Higher Education who covers the federal government and the student-loan industry. And he joins us now in the Knight Studio at Newseum. So good to have you with us, Paul.

Mr. PAUL BASKEN (Senior Reporter, The Chronicle of Higher Education): Thank you very much.

NEARY: So, this situation in Massachusetts, what's the effect of that going to be for students in Massachusetts this year?

Mr. BASKEN: Well, it - this is going on all around the country and it has been for the past few months. About two months ago, the Secretary of Education announced a plan to help avoid this from happening, and to some degree it has. But there are still lenders who are deciding that they still can't make it economically. The key problem for them is that they - in order to loan money to students, they need to get money from somewhere, and where they have to get money is out on the market like everybody else. And the market, as you know and have referred to, is getting tougher. So, for some lenders, it's a lot more difficult.

What the department then agreed to do was to help that by providing some money to some lenders and to help - buying up loans from the lenders after they loan the money to the students. That's helping some, but the Massachusetts agency, for one, and some others are not able to still make it on that, in part because they just don't have the money to start the process going to lend initially to get more money going.

Your question is, what are students in Massachusetts and elsewhere going to do when this happens? What they can do is go to other lenders, and right now, it looks like there are plenty of other lenders. To be clear, there's two types of student loans out there. One is the government-backed loans, which banks give, but they're government backed. And then there's private loans in which the lenders just give to the student without any guarantee of federal repayment.

And that's, as you might assume, a little bit more expensive. And that's the ones that a student gets after they've maxed out or borrowed as much as they can under the government program. What the Massachusetts agency announced this week was that they aren't going to be giving out private loans. They already announced a month or so ago they wouldn't be doing government-backed loans. So, students in Massachusetts will have to look elsewhere, but there are still plenty of other lenders out there.

NEARY: But just to clarify, so, the students in Massachusetts would already have their loan for the coming semester. I mean, the kids wouldn't have to - aren't finding out now that they're not going to get their loans for September, or are they?

Mr. BASKEN: They are, in fact.

NEARY: They are.

Mr. BASKEN: Well, that's...

NEARY: And can they get a loan that quickly from somewhere else?

Mr. BASKEN: Sure. They can, and they have to scramble, and this is a little bit late for them to be finding out but they're...

NEARY: Little bit?

(Soundbite of laughter)

Mr. BASKEN: Well, you know, it's - yes, you're right. It is because, I mean, a lot of the - generally, they think of the loan cycle as beginning this month, which is - now we're at the end of the July. So, it's been about a month into it, another month or so. But it doesn't generally take that long, and loan companies they can do it pretty quickly if they want to. So, it's a surprise to some but it shouldn't - at least on the federally backed loans, it shouldn't be so much of a problem.

The real - the bigger problem is, again, this is what happened with the Massachusetts agency, is the private loans, not so much the fact that the Massachusetts agency isn't going to be doing them or some other agencies isn't going to be doing them, but the fact that they're going to be more expensive, because just borrowing on the market right now is more expensive. So, you have to think a lot harder whether you want to borrow beyond the amount that you can already borrow under the government program if you want to go to a particular college.

NEARY: All right, let's go to - Rebecca is calling from South Bend, Indiana.

REBECCA (Caller): Hello.

NEARY: Hi. Go ahead.

REBECCA: Hi. Yeah, I'm in - I go to South - Indiana University in South Bend and I borrow, and normally, my lender is Sallie Mae. And I noticed this year it says Federal Direct. Is that part of the legislation that it passed? Are my loans coming directly from the government?

Mr. BASKEN: The answer is yes. There's - again, as I explained, there's two kinds of lending. There's the government-backed lending and there's the private lending. But within the government-backed lending, there's again two divisions. One is the one that I've been discussing now, which is where the banks lend you money and then they get a subsidy payment from the federal government to do that kind of lending.

Separate from that, the government - the U.S. Department of Education loans money directly to students. And when it - I don't know which schools - I know that more students have been - more - sorry - more colleges have been signing up for the direct-lending program because of the uncertainty in the banking market. And if you sign up, the college signs up with the Department of Education, then they've got a guaranteed source of government-backed loans, and it sounds like that's what your school has done.

So, what your school is telling you is that if you want a government-backed loan, you need to go through the Department of Education and get your loan directly from the Department of Education instead from Sallie Mae, which is the nation's largest student-loan company, or any other private loan company.

REBECCA: Is there any more legislation on the table as things get more uncertain and as the credit crunch scrambles (ph), is Congress - is there any more legislation pending that's going to help us borrow at cheaper rates to stay and get our degree?

Mr. BASKEN: Well, in fact, just last night, the House and Senate conferees - that's - when the House of Senate pass a bill, you have conferees that negotiate the differences between them, and they settled that last night, and they're apparently going to pass it in both the House and Senate tomorrow, which is a Higher Education Bill. It's this Higher Ed policy for the entire government, and that contains in it some provisions along the lines you're talking about.

It requires the lenders to be more upfront with the students about the terms of their loans. It requires the colleges to be more upfront with students about the cost of their loans. But in addition to that, in the past year or two, Congress has also - part of the reason why the loan companies are in the bind they're in is because what Congress did last September was they cut the subsidies that they give to the banks, and they took that money to savings and they transformed it into grant aid for students.

So, it's the government giving money directly to the students. So, in a sense, that's better for the student overall. They (unintelligible) instead of using the money to pay for subsidies to the banks, they're instead just taking that money and giving it directly to the students. So, there's hope that that will help. But you know, we're going to find out this year, you know, how much that washes out.


REBECCA: Yeah, yeah. Unfortunately, for students that made too much - I made 12,000 dollars in my sophomore year and I was unable to qualify for the program and had to start taking loans. So, the grants, it seems, are few and far between for, you know, middle-class students, at least.

NEARY: All right, thanks so much for your call.

REBECCA: Thank you.

NEARY: How bad is it really for students right now who need to get a loan?

Mr. BASKEN: Well, again, on the government-backed program, which is what most students use, there is no real change. You're going to have to - you may have to get a new lender, and you may - what loan companies had been doing was giving students some extra benefits and fee reductions beyond the minimums they're required to give under the government program. But by and large, most of those benefits weren't really materializing for students anyway. The conditions that you need to do to meet them were pretty stringent. So, there's really - shouldn't be any fundamental change on the government-backed program.

On the private lending, it is a problem, and we - or it's potentially going to be a problem. There's certainly a lot of uncertainty. We don't know what the rates will be. We don't know what the conditions will be. And again, students are - if they need to borrow beyond the amount they can borrow in the government program, they just need to really look at the numbers and make sure that it makes sense for them. I mean, there's still the argument is that a college education is worth - is well worth the amount of money people spend on it, by and large. You just have to make sure you're making the right choice on where you're going and what you're going there for.

NEARY: Right. Let's go to Rachel now. And Rachel is calling from Davis, California. Hi, Rachel.

Hello, Rachel. Are you there?

RACHEL (Caller): Hello?

NEARY: Hi. Go ahead.

RACHEL: Hi, there. Well, I was just going to share a story. My husband and I, we were about six weeks up from getting married. He had been admitted to graduate school. He just had summer school to finish, and this was at UC Davis. And about a week before tuition was due, he was told they had ran out of financial aid for summer school, and we had to put all of his tuition down on a credit card because he was, you know, about to start graduate school. We had no choice. We're in such a bind, and it was a really horrible situation.

NEARY: How much tuition are we talking about?

RACHEL: Well, I think it was - we had, like, a 5,000-dollar line of credit. I think we used up almost all of it for that - for the tuition.

NEARY: How common is that? Are you hearing that people are using their credit cards to pay tuition these days?

Mr. BASKEN: It's been a big issue, and Congress has looked at that as well. I mean, the situation she's describing, it sounds like more of an emergency situation. But it's - there's certainly cases where students are doing that and it's - I highly recommend against it. You will get some college administrators to admit that at private schools, if a student needs to do that, they should really think of going somewhere else.

The credit card issue more - what it gets into more is after the students get there, they get credit-card offers, and they get solicitations, and they don't really have the experience to know what it means to handle a credit card. That's somewhat different, in a way, from kind of the general issue we're talking about with student lending. But it certainly plays into it, because if the student, you know, goes through four years in college and ends up with a lot of debt on a credit card, it doesn't really matter whether they did it as sort of part of a calculated strategy to pay for college or a sort of a - you know, something they kind of fell into.

NEARY: All right. Thanks so much for your call, Rachel.

RACHEL: Thanks.

NEARY: And we're talking with Paul Basken. He's a senior reporter for the Chronicle of Higher Education. He covers the federal government, student aid, and the student-loan industry. And we want to hear from you. As the fall semester approaches, how are you funding this year's tuition? Our number here is 800-989-8255. Send us an email to Are you worried about where your tuition is going to come from? What advice are you giving to parents and students who are trying to secure financial aid?

Mr. BASKEN: Well, I don't actually give advice to - I mean, I'm a reporter so...

NEARY: Or what advice would you give?

Mr. BASKEN: Right. Yeah, sure, that's what I was - I mean, I'm kind of been saying it all along. What I would say is really think hard about whether you really need to go to - I mean, one thing you look at, at a private school, you kind of look at it and say private school is obviously more expensive than a public school. And therefore, it's a no-brainer, if you're having trouble, go to the public school. Go to a community college. Maybe go to a community college for two years and then transfer to another school later on.

That said, though, there's certainly a lot of private schools that are doing a lot to try and help get students in. There's a lot of competition to get students in. So, you might be surprised sometime where private school might work out for you because the amount of discounting they do. I mean, some - like, GW here in D.C., George Washington University. is the most expensive university in the country. But you know, it's around 50,000 dollars, but the average that a student really ends up paying is much less than that, because they build into that the knowledge that they're going to give a lot of grant aid to the students.

So, you need to - if you really want to go to a college that looks more expensive, then just talk with the aid administrator and really try to get, you know, down as best you can what exactly they can give you and whether you can make it go. And then you have to think about what it's - how long it's going to take you to pay that off and what job you're going to be taking - it's going to be getting you, and seriously whether you're going to be able to afford it and make a hard decision based on that. And if it means, you know, working for a year first, going to community college first, choosing a different school, then you need to think seriously about that.

NEARY: All right, let's take a call now from John, calling from Riverside, California. Hi, John.

Hello, John?

JOHN (Caller): Hi. Yeah, actually, I just have a comment on just the way - like, what I have to do personally to take on loans. I'm actually about to attend a new school and it's going to cost me a lot more. But in order to actually get enough funding from the school, or just to even take out loans, I actually have to move out of my parents' home and take on a lot of extra bills and a lot of extra money on myself just so that they can help fund me just to go to the school that I need to go to in order to get, you know, what degree I want and whatnot. So, it kind of - it's not really a good position to be in just because of how much money I have to take on now just to get loans that I have to pay off later.

NEARY: So, people are making very tough choices now, it sounds like.

Mr. BASKEN: They absolutely are, and in doing it - I mean, part of the problem is that you're asking a student, somebody coming out of high school, to make one of the most massive financial decisions imaginable in your lifetime, and you're making it with, you know, very little experience. I mean, this is a decision that an adult with, you know, 20 years of experience in the workforce might have trouble evaluating, you know, what's the right thing to do, and you're asking a high school student to try and make that decision. That's a lot to ask.

NEARY: All right. Thanks for your call, John.

JOHN: Thanks.

NEARY: And you're listening to Talk of the Nation from NPR News. Let's go to Steve, who's calling from Lebanon, Ohio. Hi, Steve.

STEVE (Caller): Hi, how are you?

NEARY: Good.

STEVE: Just have a question regarding interest rates on the federally-backed student loans. It seems to me that I read recently, in preparation to getting my daughter off to school this fall, that the interest rates had been structured to be gradually lowered over the next three or four years, that that had passed the Congress and the Senate. Is that still in play? I'll take my answer off the air.

Mr. BASKEN: It is.

NEARY: OK, thanks.

Mr. BASKEN: Yes, sir, it is. It's - if I've got the numbers right, I believe it's 6.8 percent. I mean, there's different programs. There's a parent loan. There's undergraduate loans. There's subsidized. But the general rate right now, I believe, is 6.8 percent for a government-subsidized loan, and it's supposed to drop to 3.4 percent over the next five years and it's on schedule to do that. One of the things, of course, is that after those five years - you know, Congress writes legislation that lasts, you know, sometimes that long, five years, but then they don't write what's going to happen after that. So, the understanding would be that it would pop back up to 6.8 right after that unless Congress does something. But yes, the answer is yes. It's supposed to gradually decline on the next five years.

NEARY: All right. And we're going to go to Jim in Cleveland, Ohio. Hi, Jim.

JIM (Caller): Hi, how are you?

NEARY: Good.

JIM: I just turned on the radio. I'm actually driving to the Cleveland Indians game, but I thought I'd give a quick call. I'm not in the student-loan arena right now. I graduated in 1996 from Ohio University, and I had to take out all kinds of loans. And I remember even back then that the loans that the government subsidized, they were not enough to cover the cost of tuition. And we went, my brother and I, who were going to Ohio University together, went through all kinds of appeals to try and get more money and we just couldn't.

And I was wondering, do we need to look at why loan amounts are so low? Because it seems like so many students need to go to a lot unsubsidized loan, which is causing so many problems for them. How is that determined what the limit is that a student can borrow that the government will back? And maybe with the cost of tuition, do we need to review that? I remember only paying 3,000 dollars a quarter at Ohio University, which I believe, they're still on quarters. And now, the cost of higher education is staggering for a four-year degree.

Mr. BASKEN: Well, the answer is that it's set by Congress, and Congress, in fact, just did increase those loan limits. It's - there's argument on both sides to that question, as to whether they should do it. The loan limit, up until recently, had been, if I'm getting these numbers right, I believe it's 3500 dollars a year for a freshman, 4500 for sophomore and then it goes up to 5,500 a year after that. And they just increased all those by 2,000, and maybe some - I think roughly that's what the numbers are.

In any event, the question is, you know, yeah, I mean, there's this sort of, like, yes, one solution, especially as private loans get more difficult and more expensive, is to simply increase the amount you can borrow into the government program. One of the problems with that is that that encourage - you know, that could lead to inflation in costs, and there's a lot of concern already that the cost of college is too high. And if you simply allow students to borrow more then you could be putting, you know, upward pressure on colleges to raise the prices even more. That doesn't help anybody in the long run either.

NEARY: All right, Paul. Thanks so much for being with us.

Mr. BASKEN: Thank you, Lynn.

NEARY: Paul Basken is a senior reporter for the Chronicle of Higher Education, and he joined us today in the Knight Studio at the Newseum. This is Talk of the Nation from NPR News. I'm Lynn Neary.

(Soundbite of applause)

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