February 26, 2008

Pheaa Temporarily Suspends Federal Student Loans

The acting chief of Pennsylvania’s student-loan agency told state legislators on Tuesday that his agency would temporarily stop making new loans through the federal guaranteed-student-loan program, the Associated Press reported.

James L. Preston, acting president of the Pennsylvania Higher Education Assistance Agency, or Pheaa, said the agency had decided two weeks ago to suspend loans made outside the state, and now had decided also to suspend in-state loans, effective March 7.

The decisions stem from a credit crunch that has created turmoil in the bond markets. “Right now, it’s not profitable for us at all to finance” federal student loans, Mr. Preston told state lawmakers in Harrisburg, Pa., during a hearing on Pheaa’s budget. Instead, he said, the agency will steer prospective borrowers to banks that are still participating in the federal program.

A number of student-loan companies, including the College Loan Corporation, Nelnet Inc., and Sallie Mae, have either left the federal program or scaled back the types of loans they offer. In those decisions, lenders have cited both the credit crisis and cuts in the federal subsidies paid to lenders in the government-backed program. In addition to those problems, Pheaa is contesting a decision by the U.S. Department of Education that it should repay $15-million in subsidies it received in the past. —Charles Huckabee

Comments

1. So your solution is to use a program that-according to the President’s burget-is more expensive for the taxpayer. And has a higher default rate which is more expensive for the taxpayer. And you want to finance all student loans by increasing the debt, which is more expensive for the taxpayer. Gee, that’s certainly good public policy

   — hawkeye    Feb 27, 09:38 AM    #

2. This is very sad news for the students who need financial aid and for the PA colleges that PHEAA serves. I find this news very troubling for Higher Education nationwide.

   — David Gray - GA    Feb 27, 09:57 AM    #

3. Sure making no money on a loan is good buisness practice. All companies should make no profit on anything, or heck they should lose money on the products they offer. A company will be around for a long time if they make no profitt. Lets forget the fact that school tuition doubles every 4 years. Schools are shocked that the average student owes 25k, when there school charges 10k a year for tuition. Blame the lenders lending money for a profit, hey thats ridiculous that a company needs to make money. If a Lender did not make a profit, how can they stay in business. The Department of Education is only able to handle 10% of schools financial aid. So the other 90% of schools should get no money then if the Federal subsides lenders did not exist.

   — mikey    Feb 27, 11:04 AM    #

4. This only affects the loans for which AES/PHEAA is acting as the lender. Hundreds of other lending institutions participate in the FFELP lending program that students may choose. The interest rates are fixed by the government, and are the same as they are for the Direct Loan program—-no difference there. AES PHEAA is contuing to act as a guarantor & servicer of those loans. Their decision should not reflect on a student’s ability to receive a Stafford Loan. Many schools have left the Direct Loan program because of the difficulties involved with administering the program.

   — MA    Feb 27, 11:04 AM    #

5. The problem is that there is no moneyl left to loan students when the loans are not profitable. Where in this country did students come up with the idea that lenders should not be able to make a profit on loans? How else are they going to be able to raise capital and provide money for students the following year? Direct Loans has tried this before and it failed miserably and cost tax payers money and the only people that got hurt were the students. A Gorstein, do some more research, Mikey I am glad that you have an educated background and understand how the finacial world works.

   — AJ    Feb 27, 11:15 AM    #

6. AJ you are absolutely correct. Direct Lending has been tried before and their servers crashed and they were 90 to 120 days behind in processing the loan applications. Ladies and gentlemen if you need FA do not wait to last minute. PHEAA is only the first of many lenders that will stop issuing government loans. It is not about profits it is about there is no money for them to issue loans. Please don’t be naive, you may find yourself out of school and repaying student loans.

   — DLH    Feb 27, 02:09 PM    #

7. It’s off the mark to suggest that the cuts to subsidies are the sole reason for the lenders problems. As the article highlights, it is the credit crisis that is the real issue right now. The government did not eliminate profit as some have suggested here. They reduced profits by eliminating taxpayer funded subsidies that were inflating the lenders profits. As others have mentioned, there are still hundreds (I think I heard there are actually 3000+) of FFELP lenders out there happy to make loans—and presumably some profit.

   — CP    Feb 27, 02:19 PM    #

8. The government has been working hard to make college more affordable for students and, true to form, have failed. Rising tuition costs are the source of the entire problem. It is VERY true that federal student loans are no longer profitable for lenders. By trying to take out the middleman, the government is effectively reducing sources of financial aid and HARMING students’ ability to go to school. Private industry is an essential element that we cannot do without. The government CAN NOT handle the financial aid program themselves. This is hurting all lenders but, more importantly, it is hurting students!!

   — Torrey    Feb 27, 04:13 PM    #

9. Most of the 3000+ lenders have already dropped out of federal loans, they did that back in october. All the small ones are gone, it was the big ones like PHEAA, SALLIE MAE, Nelnet that were still doing them until now. So essential there is non left. I asked my school, and they had no options for me on a federal loan anymore. Maybe finally the schools will lower their tuition. Even federal consolidation companies do not offer consolidations anymore. Look at sallie mae website, they use to love to sell you a federal consolidation, now they talk against it. This summer there will be no federal loans, besides the DOE.

   — mikey    Feb 28, 05:48 PM    #

10. Pheaa and other lenders are leaving the student loan business for several reasons. I think that just one of these reasons would not have been enough to push them out of the market, but we have a rare set of set-backs occurring all at once.

    Pheaa and other governmental/nonprofit issuers of tax-exempt debt have typically issued bonds backed with bond insurance, and had them sold in the auction bond market on a variable rate basis.

    The fallout and spill-over effects of the sub-prime lending practices of major banks and the securities that were designed to bundle and resell sub-prime home mortgages have played havoc with this method of finance. First, the fair market valuation issues related to these asset backed debt issues has effectively paralyzed the bond auction market. While some believe that the market may be resuscitated, personally, I think it is permanently dead.

    Second, the rating agencies have announced that the AAA credit ratings of student loan bond insurers are under review. While they still have AAA on their face, many believe that their actual financial situation is much worse. If (and really, when, unless drastic infusions of capital are put into them) these large bond insurers are downgraded, the bond market is going to take a tremendous hit. In the mean time, the market right now puts a penalty on any bond issue that backed with these bond insurers. The typical substitute, bank letters of credit, are in high demand. Many of the banks are already tapped out for the calendar year; others say they will only provide letters of credit to their best customers and credit, and at a premium cost. While this part of the fallout does not affect government guaranteed student loans, it does affect private student loans, another source of revenue for student loan lenders.

    Third, the credit rating agency “stress tests” for student loan bonds are being made more restrictive, as the rating agencies react to continuing financial losses in the market.

    Then, on top of all of this, the recently enacted College Cost Reduction Act of 2007 reduced the subsidies on student loans, and made the business less profitable.

    The lenders who will stay in the business will be the big banks, like Citibank, Wells Fargo, and Bank of America. They see the student loan business as a loss leader for their institutions. They want to hook you into debt with them at a young age, and then have you continue with credit cards, checking accounts, car loans, and home mortgages. You will see small community banks and credit unions deciding to leave, if they haven’t left already.

    The nonprofit/governmental lenders may hang in there if they can absorb current losses. They are in a difficult situation, deciding between their mission to serve their students now, and maintaining financial viability over the long run.

    What will be the end result for students? First, anyone who has a student loan out now on a variable rate basis? You can expect that interest rate to go up. Maybe way up. If you are going to be taking out a loan in the near future, whether FFELP or private, expect fewer lenders to choose from. Expect higher interest rates, fewer incentives and benefits. Because of the more difficult situation for the students, the service-mission driven governmental/nonprofit lenders may especially want to help. But the economics may keep them out.

    The end result for those in the student lending business? At least in the subprime mortgage market, there was an asset (even if at an over-inflated price) standing behind the loan. Student loans are unsecured. Lenders are betting that students will get jobs when they graduate and pay them off. If we’re headed into a recession, how many students will not make good on the loans? The FFELP loans are at least insured by the federal government, and they may end up holding the bill. But what about the private student loans? Will they be the next domino pushed over?

    — Claire    Feb 28, 07:03 PM    #

11. Another aspect of the student loan crisis: those people owning state issued student loan bonds have no market to unload these bonds. Touted as “cash equivalents” those holding these long term notes find their investments are neither “liquid” nor “safe”. What options do they have? Is anyone or any institution buying these bonds?

    — worthy    Mar 4, 12:55 PM    #

12. Below is a list of education lenders who have laid off staff or temporarily suspended or permanently exited one or more student loan programs since August 2007.

    Some of these lenders may have exited FFEL or private student loan programs for reasons unrelated to the subprime mortgage credit crisis or the cuts in FFELP lender subsidies.

    The total job loss estimate for the student loan industry is more than 2,059 layoffs.

    Lenders exiting or suspending FFELP include: American Educ. Svcs (AES)/PHEAA; Brazos (in-house); Capital One/Axiom; College Board; College Loan Corp; Collegiate Solutions; Fed. Student Loan Soltns; FinanSure; First Niagara Bank; Goal Financial; Independent Bankers Bank; Iowa Student Loan; National Education; NextStudent; Student Capital Corp.

    Lenders suspending only FFELP consolidation loans include: GCO-ELF; ISM Educ. Loans (Indiana); MOHELA (Missouri) ; NELNET

    Lenders exiting or suspending private student loans include: FinanSure; HELP Alternative Loans; Loan to Learn; MOHELA (Missouri); Michigan Higher Ed SLA; Sallie Mae (Recourse Loans Only); Student Loan Xpress

    Lenders with failed student loan securitization auctions include: Brazos; EdSouth; College Loan Corporation; Montana; Mississippi; Sallie Mae; First Marblehead;

    Lenders laying off staff: College Loan Corporation; FinanSure; First Marblehead; Goal Financial; Illinois SAC; Loan to Learn; NELNET; National City Bank; National Education; NextStudent; US Education Finance Group

    To address worthy’s question (#12), some of the buyers of auction rate securities are hedge funds coming in for the kill. The borrowers who have failed auctions are actually the lucky ones – they had pre-set maximum rates below where the market is currently. Those who had high max rates are paying them – at 12 -20% interest.

    — Claire    Mar 10, 03:15 PM    #

13. If you don’t live near Pittsburgh you may not be aware of the investigative reports concerning PHEAA. Check out this link. http://www.thepittsburghchannel.com/search/form.html?la=en&video=on&stories=on&client=pub-1569153127812452&forid=1&channel= 9915608602&ie=ISO-8859-1&oe=ISO-8859-1&hl=en&cof=GALT%3A%23000000%3BGL%3A1%3BDIV%3A%23336699%3BVLC% 3A000000%3BAH%3Acenter%3BBGC%3AFFFFFF%3BLBGC%3A336699%3BALC%3A0000FF%3BLC%3A0000FF%3BT%3A000000% 3BGFNT%3A000000%3BGIMP%3A000000%3BFORID%3A11&sitesearch=thepittsburghchannel.com&mkt=&heading=&qt=pheaa&x=11&y=7

    — David    Mar 18, 06:00 PM    #

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