Daily Aid 74: Student loans as investments, marriage and FAFSA

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Daily Aid 74: Student loans as investments, marriage and FAFSA

2 February 2009 1 views No Comment

Daily Aid 74: Student loans as investments, marriage and FAFSA

Student Financial Aid News

From Bloomberg:

The U.S. Treasury agreed to commit as much as $60 billion to shore up the market for student loans and help reduce the illiquid assets clogging banks’ balance sheets, according to three people familiar with the matter.

The department will use its Federal Financing Bank to provide a backstop for an initiative put together by Citigroup Inc. and Morgan Stanley, the people said. The so-called conduit will purchase existing and new student loans from banks, and issue asset-backed commercial paper to finance itself.

The program, which is outside of the $700 billion financial-rescue fund and doesn’t need new congressional action, comes as officials and lawmakers seek to broaden the government’s help beyond bailouts for Wall Street. Premiums on bonds backed by student loans more than tripled in the past year amid an exodus of investors from all but the safest assets.

Commentary

Good news and bad news on this. It’s good news for students looking to take out federal student loans from student loan companies, as it will free up a lot of capital and possibly bring companies back in the game who had been on the sidelines since the credit markets went south.

Here’s the bad news: student loans aren’t a particularly safe investment. A lot of noise is made in the financial aid world about cohort default rate, about keeping the cohort default rate down, and many institutions have done so. The trick is this – the cohort default rate is an inappropriate way to measure student loans as an investment.

The Department of Education’s definition of cohort default rate is:

A cohort default rate is the percentage of a school’s borrowers who enter repayment on certain Federal Family Education Loan (FFEL) Program or William D. Ford Federal Direct Loan (Direct Loan) Program loans during a particular federal fiscal year (FY), October 1 to September 30, and default or meet other specified conditions prior to the end of the next fiscal year.

In other words, it measures two years of a loan’s performance. Here’s the trouble – federal student loans like the Stafford loan have 10 year repayment terms – up to 30 if you consolidate your student loans. Private student loans have repayment terms ranging from 15 to 30 years. If you’re trying to get a sense of how an investment in an asset-backed security like securitized student loans are going to perform, cohort default rate is a terrible measure.

At the 2008 EASFAA annual conference, one guarantee agency revealed that the actual default rate for federal student loans ranged from 20%-40%, with many defaults occurring between years 5 and 7. Anyone considering investing in student loan-backed securities needs to dig in to find the real default rate of any portfolio and examine its performance. For this particular measure as part of economic stimulus, the taxpayer is likely to be left holding the bag for a lot of non-performing loans.

In the bigger picture, default rates in general will be going up over the next couple of years through a combination of a brutal economy and higher loan burdens for students graduating from school. To deal with these larger issues, families need to lobby Congress for cost controls on tuition for any institution accepting federal grants or other taxpayer dollars, while individually trying to round up as many scholarship dollars as possible. If a college or university wants to continue raising tuition 5-7% a year, they’re welcome to do so as long as they don’t take taxpayer money, just like any other business.

Scholarship Update

The College Assistance Migrant Program (CAMP) is a 100% federally-funded grant available only during your college freshman year. You must be a U.S. citizen or U.S. permanent legal resident, be obtaining your GED or high school diploma, and be seeking a four-year academic degree to be eligible. You and/or your family must been migrant or seasonal farm workers doing agricultural activities directly related to the production of crops, dairy products, poultry or livestock; the cultivation or harvesting of trees; or fish farms at least 75 days during the past 24 months. Additionally, you can only apply this scholarship at one of the (38) existing colleges that have this federal grant. Participants of the Migrant Education Program (MEP) and the Workforce Investment Act (WIA) are encouraged to apply.

Details at our free college scholarship search site.

Mail Bag

Goldka writes in:

I’m getting married roughly 3-4 months after filing the FAFSA. Does that mean I have to file as a dependent for now and after getting married, I would have to file with a correction? After filing with a correction, would that affect the amount that I would be eligible for? Normally most individuals would encourage filing the FAFSA early to be eligible first for grants, etc. Any feedback would be appreciated. Thank you.

Good questions. Congratulations, by the way, on your upcoming marriage. You’re indeed a dependent now and an independent later, but you’re right to say that filing now is more important.

Updated: Val Meyers from MSU corrected me on this: A student cannot update the FAFSA to change marital status mid-year. If he files now, he’s dependent the whole year. If he waits to file until after he is married, then he can be independent.

So what I’d recommend with this new information is to try out the Department of Education’s FAFSA Forecaster with married vs. single status and see what impact that delivers on your financial aid. If it’s significant, it might be worth waiting. If it’s not significant, file earlier rather than later.

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