student loan credit crunch, American Opportunity Tax Credit
Evan Vucci/AP
Treasury Secretary Henry Paulson, left, and Federal Reserve Chairman Ben Bernanke.

Can the Federal Government Save the Student Loan Market?

December 01, 2008 10:07 AM
by Anne Szustek
The Federal Reserve recently announced a $200 billion lending facility for private student loan lenders. Is this the best way to make higher education affordable?

Is the Fed Giving Credit Where It’s Due?

The Federal Reserve unveiled its plan to lend up to $200 billion to banks and other financial institutions that control credit card-, car loan- and student loan-backed securities.

The funds are to come from the $700 billion financial rescue package. Originally devoted to buying up mortgage-backed assets, on Nov. 12 that portion of the package was abandoned in favor of freeing up the consumer credit market.

“Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,” Treasury Secretary Henry Paulson said, according to findingDulcinea. “This is creating a heavy burden on the American people and reducing the number of jobs in the economy.”

One of the burdens to which Paulson was referring: accessibility to student loans. One non-profit lender of private student loans, the South Carolina Student Loan Corp., announced on Monday that due to an inability to sell bonds, it is not taking any further applications for private loans.

The South Carolina Student Loan Corp is one of more than 60 lenders that have curbed lending on private loans, however. Kevin Bruns, the executive director of America’s Student Loan Providers, wrote in an e-mail quoted by The Chronicle of Higher Education that the $200 billion lending facility is “good news for families who rely on student loans to pay for college. By increasing liquidity, it should further guarantee that federal student loans will continue to be funded.”

Though lenders of nongovernmental loans were happy with the plan, public institutions of higher education and student advocacy groups have decried the move. In a letter to Paulson quoted by the Chronicle, the groups said that students and their families “need safe and reliable [financing] options, not more of the same risky private loans.” In May, the Department of Education made an agreement to buy up federally backed student loans, such as Stafford Loans, issued by private lenders.
Private loans are a popular college-financing option right now. The volume of private student loan lending is far outpacing that of government student loans—25 percent annual growth compared to 8 percent a year, respectively, according to FinAid. The online financial aid information site writes, “If current trends continue, annual private education loan volume will surpass federal student loan volume within a decade.”

FinAid recommends that students only opt for private loans, also known as “alternative loans,” when they have borrowed beyond the maximum annual amount allowable under government loan programs such as Stafford and Perkins loans.

Background: Credit crunch putting higher education out of reach

Individual states, facing their own budget problems, are hoping that they can tap into President-elect Barack Obama’s proposed “Two-Year Economic Recovery Plan” to bolster state programs. During a press conference Nov. 24 during which Obama named Tim Geithner, head of the New York Federal Reserve, as secretary of the Treasury, he mentioned the plan but didn’t give concrete monetary figures. Before the election, though, Obama mentioned a need for $25 billion in general state aid and another $25 billion to fix infrastructure.

Already foreseeing steep budget shortfalls during fiscal year 2009, the National Governors’ Association has drawn up a $126 billion budget for “potential recovery programs.” The plan, which would be supported by federal funds, includes $5 billion for education and job training, $3.5 billion of which would go to Pell Grants—nonrepayable aid given to the neediest students. The maximum Pell Grant available during the current school year is currently $4,731.

In addition to any possible federal aid that could trickle into state funds for education, the American Opportunity Tax Credit, Obama’s campaign proposal to help lessen the financial burden of higher education, would grant families up to $4,000 in tuition reimbursement in exchange for 100 hours of volunteer work.

Reference: Financial aid resources


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