Daily Aid 104: Student loan default rate secret

Student Financial Aid News

From Inside Higher Ed:

As Congress prepares to take up their 2010 budget blueprints, supporters and critics of President Obama’s proposal to eliminate the Family Federal Education Loan program are ramping up their arguments for and against the plan. The Consumer Bankers Association has attracted more than 4,000 college financial aid administrators, parents and loan industry officials as signers of a petition asking lawmakers to sustain the competition between the lender-based guaranteed loan and the competing direct loan programs. The heads of more than a dozen state associations of financial aid administrators also have written letters opposing the plan. The National Direct Student Loan Coalition, meanwhile, sent their own letter to members of Congress arguing why the president’s plan deserves their support, focusing on the fact that it will allow lawmakers to use $94 billion in projected savings from the changes to help increase grant and other funds for students.

Commentary

Not much more needed. I stand firmly on the belief that both programs should be merged to function as one, making the Department of Education a lender like everyone else. As long as companies have to compete with the government and vice versa, efficiency will improve or students will simply get a loan elsewhere. Free market rules.

From NASFAA:

“The most important fact about the preliminary data the U.S. Education Department released Thursday about student loan default rates is that the rate at which borrowers whose loans went into repayment in 2007 defaulted rose sharply, to 6.9 percent from 2006’s 5.2 percent,” Inside Higher Ed reports. “That would seem to be a clear sign that the economic downturn is increasingly taking its toll, a worrisome trend from a public policy standpoint. However, in the highly politicized environment of our nation’s capital, the department’s release of the numbers drew attention for other reasons, most notably because the agency — for the first time ever — broke the data down to highlight the differences between how borrowers fared in the government’s two competing loan programs, showing that borrowers were likelier to default in the lender-based guaranteed loan program, 7.3 percent to 5.3 percent.”

Commentary

There’s a secret here no one is talking about. Up through 2006, student loan consolidation was a hot industry, with hundreds of companies competing to consolidate student loans. Once times changed and the ability to sell loans on the market disappeared, originating lenders held onto far more of their student loans than in previous years.

When a student consolidates their student loans, the original lender has the loan marked as fully paid on its books, and the new lender takes on a consolidation loan, which doesn’t count towards the default rate of either a school or the original lender. When consolidation was a hot business, the majority of students would consolidate their loans, making default rates artificially low. Once consolidation as a business virtually disappeared, default rates spiked upwards.

Scholarship Update

The National Society of Hispanic MBAs, which exists “to foster Hispanic leadership through graduate management education and professional development,” has established a scholarship program to assist qualified Hispanics to pursue MBAs. Scholarships are offered each year for full- and part-time study at an accredited (AACSB) institution of the student’s choice.

Details at our free college scholarship search site.

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