The Ensuring Continued Access to Student Loans Act of 2008 seeks to guarantee that federally backed loans will be available to college students and their parents even if the marketplace for student loans contracts significantly. The legislation increases the annual and total limits that students can borrow through the federal government’s unsubsidized Stafford loan program. The program provides students with low-interest rate loans that accrue interest while a student attends school. The bill increases the annual limits by $2,000 for dependent students and raises the aggregate ceiling to $31,000 for dependent students and $57,500 for independent students. Additionally, the act allows parents who borrow under the PLUS loan program, which provides loans up to the total cost of education minus any other financial aid received, to defer repayment for 6 months after their child has left school. Currently, parents must commence repayment 60 days after the first disbursement of loan money. Additionally, the legislation adds two extenuating circumstances that permit parents with bad credit to receive PLUS loans: delinquency of up to 180 days on home mortgage payment and on medical bill payment.
Furthermore, the Ensuring Continued Access to Student Loans Act clarifies and strengthens the role of lenders-of-last-resort, which are guarantee agencies – normally charged with insuring student loans against default – that offer loans to students who are unable to obtain them from another lender. The act authorizes the Secretary of Education to direct federal funds to guarantee agencies that are operating as lenders-of-last-resort. Whereas current law obligates individual students to demonstrate an inability to borrow from other sources in order to obtain a loan from a lender-of-last-resort, the legislation authorizes the Secretary of Education to designate eligibility on an institution-wide basis according to guidelines set forth in the bill. Finally, the act grants the Secretary temporary authority to purchase loans from lenders in the federally guaranteed loan program if the Secretary determines that lenders are unable to meet the demand for student loans. Lenders must use the proceeds from the sale of loans to continue their participation in the federal student loan program.
The Middle-Class Position:
The Middle Class Supports. With 66% of students at four-year colleges holding student loan debt, the credit crunch has generated concerns that aspiring middle-class and middle-class college students and their parents will be unable to obtain the loans they rely on to afford college. Federally backed student loans, which are cheaper than private student loans, provide these students with a financial gateway to higher education. Increasing the amount of Stafford loans that students are able to borrow would help students cope with tuition costs that they would otherwise have to fund with more expensive private loans. The delay in PLUS loan repayment authorized by the bill, along with the exemptions for delinquency on mortgage and medical bill payment, recognize that the declining economy in general, and the collapsing housing market and rising health care costs in particular, are squeezing many middle-class American families. In conjunction with the act’s other provisions, the authorizations of funding for lenders-of-last-resort and for purchases of student loans by the government minimizes the risk that the marketplace for federally backed student loans will collapse.
From the Experts:
“We applaud the Committee’s attempt to enhance the student loan programs so as to avoid potential disruptions due to instability in the credit market. We are, as of now, unaware of any eligible borrower being unable to obtain a federal student loan. However, efforts to reform and strengthen our loan programs can be valuable even if access problems never materialize.” – Gabriel Pendas of the United States Student Association and Luke Swarthout of the U.S. Public Interest Research Group (April 9, 2008)
In the midst of the current credit crunch and with daily media reports about student loan instability, it is important to help students and their families differentiate between federal and private loans and to reassure them that Stafford Loans, PLUS loans and Grad PLUS loans are available. While there have been reports of certain FFEL lenders leaving the program, temporarily suspending operations, or redlining certain schools due to graduation or default rates, this is not the case in the Federal Direct Loan Program. Direct Loans are funded as a student entitlement from funds borrowed wholesale from the private sector through the sale of Treasury Securities. There is never a question of capital availability in the Direct Loan Program. This differs from FFEL. In that program lenders are entitled to subsidy and default payments if they choose to make loans to students. – Roberta Johnson, Director of Financial Aid, Iowa State University (March 14, 2008)
Beyond this Bill:
In addition to raising caps in the Stafford loan program, Congress could also increase the caps in the Perkins and subsidized Stafford loan programs, which offer loan terms that are more favorable to students. When it comes to guaranteeing the continued availability of student loans in the event of a credit crisis, relying on an untested “backstop”, the lenders-of-last-resort program, to guarantee the continued availability of student loans may not be the most effective solution. A more sensible approach would encourage utilization of the Direct Loan program, as many universities are already doing. The program offers loans to students directly from the federal government instead of through private lenders, minimizing administrative costs, and is a tested alternative to lending under the Federal Family Education Loan Program, which utilizes private lenders.
Increasing the amount that students are able to borrow from Stafford lenders will increase the debt burden on students, especially at for-profit institutions that base their tuition on federal aid. When students are able to borrow more, these schools – which are overwhelmingly attended by low-income aid recipients – are able to charge more.
Minimum number of student lenders in the Federal Family Education Loan Program: 2,000
Percentage growth in undergraduate federal borrowing between 1996-1997 and 2006-2007 school years: 51
Percentage increase in the number of undergraduate subsidized Stafford loan borrowers between the 1996-1997 and 2006-2007 school years who do not have to pay interest on their loans while attending school: 47
Percentage increase in the number of undergraduate unsubsidized Stafford loan borrowers between the 1996-1997 and 2006-2007 school years who must pay interest on their loans while attending school: 113
Percentage of total funds used to finance postsecondary education composed by private loans in the 1996-1997 school year: 3
Percentage of total funds used to finance postsecondary education composed by private loans in the 2006-2007 school year: 12
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