Sallie Mae, the nation’s largest student loan company,
announced last week that its government-funded student loan program will soon
suffer a financial shortage as a consequence of increased borrowing costs and a
new law that reduces the amount of government subsidies for guaranteed student
loans.
Currently, student loan interest rates are capped at 6.8
percent, creating a loss in profit for each federal loan Sallie Mae issues.
Formally known as SLM Corp., Sallie Mae reported a loss of $103.8 million in
the first quarter of 2008, in comparison with a profit of $116.2 million last
year.
There are two types of student loans: those secured by the
federal government through lending companies and the U.S. Department of
Education, and those within privately funded programs. The economic crisis is
most damaging to the latter of the two, according to Executive Director of
Student Loan Providers Kevin Bruns.
Student loan companies receive their finances for loans from
an investment source and in turn are able to lend out these loans at a higher
cost, and the difference between the two is where lenders like Sallie Mae
generate their profit. However, the recent credit crisis that has proliferated
through the
economy has jeopardized the various funds that lenders need in order to provide
student loans. Sallie Mae and other companies were able to absorb the fees
charged by their sources and issue loans at discount rates, but now
affordability is in remission and the difference in the loans shows up in
tuition as a statutory fee.
“The amount of money it costs to make the loans will be
higher because the lenders aren’t making the same level of profit [compared to]
past years,” Coordinator of Student Financial Support for the UC Office of the
President Nancy Coolidge said. “Since the government has reduced — not
eliminated — the amount of subsidies provided, the students will pick up some
of the difference.”
Despite this turn of events — which is making college
students across the country anxious about financing their education —
university officials say UCSD students’ primary source of aid, federal loans,
will remain relatively untouched. Coolidge said the effects of the increase in
private loans will most likely surface as a 1-percent origination fee for UC
students.
“The lenders are passing along the change, so that’s what
UCSD students will notice — the fact that their loans will cost more since
they’ll get fewer discounts from less competition,” she said.
However, Coolidge said UCSD students should not struggle to
find government-subsidized loans, since Sallie Mae and other lending companies
will continue to offer federal loans. The Financial Aid Office also features a
Preferred Lenders List to assist families in choosing loans.
Of the $85 billion educational finance market, 61 lending
companies are no longer participating in federal loans for the 2008-2009
academic year, and 21 lenders will withdraw from the private student loans
sector.
“There need to be proactive solutions rather than the
current reactive solutions that wait until there is a potentially destructive
crisis upon us,” publisher of financial aid Web site FinAid.org Mark Kantrowitz
said. “Congress and the administration are looking into solutions to prevent
this crisis from occurring, which would ensure no disruption from obtaining
student loans.”
Potential solutions circling Capitol Hill include allowing
lenders to borrow multiple federal loan banks in exchange for a highly rated
student loan as collateral, or increasing the federal loan limits so that
students who have been denied a private loan will have the opportunity to
borrow from federal lenders.
The College Reduction and Access Act of 2007 cut the amount
of government subsidies issued to lenders as incentive to provide federal
student loans, and these finances were reallocated into various financial aids
such as the increase in the maximum Pell Grant — which will reach $5,400 by
2012 — but their redistribution has negatively affected the loan market.
