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The Financial Path to College

The nation’s economic crisis has taken its toll on colleges, students and families. Tuition continues to climb as a result of battered state budgets while the funds to pay for college become increasingly harder to obtain. At a time when families are struggling with unemployment and strained resources, they face additional roadblocks, unable to count on home equity loans and 529 savings plans./p>

The financial crisis has also altered the landscape for providers of postsecondary financing. To understand the current state of higher education financing, a review of how it has been affected by the credit crisis, the programs introduced to ensure that students and families have access to funds to pay for college, and the overall changes being proposed to the federal student aid system, is in order.

Dealing with the Economic Wrath

The number of college students who rely on outside financing is sizable. The Department of Education estimated that for academic year 2008-2009, 8.5 million borrowers received approximately $72 billion in federal student loans to help meet expenses for postsecondary education. Many students also turn to private educational lending to cover their expenses. The College Board estimated that last year students received $20 billion in private loan funds.

This system has been seriously disrupted by the turmoil in the financial markets. Just over a year ago, before the full extent of the credit crisis was realized, there were challenges in the student loan marketplace with providing financing. The student loan community worked with Congress and the Administration to formulate a solution to ensure the availability of student loan funds at no cost to the federal government. 

The Ensuring Continued Access to Student Loan Act (ECASLA), passed by Congress in May 2008, gave the Department of Education authority to provide liquidity for student loans. The Department recently reported on the 2008-2009 programs and confirmed that the financing had been effective. Every borrower who needed a student loan for the 2008-09 school year was able to receive one and the same will be true next year. The Congress required that the ECASLA programs be cost neutral to the taxpayer. In fact, the government has made money on these programs. One particularly innovative program involves the government providing support for private financing. This so-called “conduit program” is particularly beneficial because by using private financing, it hasn’t led to an increase in the growing national debt

Private Loans

With respect to the other significant financing piece – private loans – the credit crisis has rendered these loans more expensive and less available. Students and parents require a higher credit score to obtain them and the terms are less favorable. To meet the demand, several schools and states have come up with creative solutions to provide funding to students and families. By partnering with credit unions, schools have been able to target private loans specifically to their students. Several states have introduced their own loan programs. The State of New York recently passed legislation creating a private loan program that provides students and families with lower interest rates, a wider acceptance rate and an online comparison and selection tool. As the economy continues to improve, we expect the private loan offerings will as well.