Miami University students can rest easy as the economic crunch causes some banks and loan providers to change programs to the disadvantage of some college students.
Sen. Edward Kennedy (D-Mass.) and Rep. George Miller (D-Calif.) signed a letter to Secretary of Education Margaret Spellings Feb. 28 urging her to take steps to protect student borrowers in case a large number of lenders through the Federal Family Education Loan Program (FFEL) were no longer able to provide funding for students and had to withdraw from the guaranteed-loan program.
According to Chuck Knepfle, director of student financial assistance at Miami, two different loan programs exist for college students.
There are federal loans that are capped at a certain dollar amount with a fixed interest rate.
There is also a set of private or alternative unlimited loans that are issued through private banks, similar to how a bank would issue a consumer loan. However, with private loans, Knepfle said the bank carries the risk of the loan not being repaid.
At Miami, students initially borrow directly through the government with no banks involved-a process called direct lending.
"Other schools use private lenders to provide capital for guaranteed student loans," Knepfle said. "In exchange, the private lenders have the loan guaranteed by the government, and the government reimburses the bank for 95 percent."
Knepfle said that nearly a year ago, Congress passed a law that decreased payments to banks who issue private loans to students so that banks cannot make as much money off of the loans as they used to.
Secondly, out of the 2,700 banks in the country that issue federal loans, Knepfle said about five or six of them are telling the U.S. government that they may have to back out of being a provider under the FFEL loan program.
"The bank goes and borrows the money cheaper than they charge the students," Knepfle said. "There are some banks, especially non-profit institutions, who are telling Congress that they are having trouble getting capital to loan to students and they may have to drop out."
Miami students, however, should not be in danger of losing loans since Miami encourages its students to exhaust federal loans directly through the government before seeking private loans.
"We theoretically could be affected by those loans," Knepfle said. "A lender could decide not to loan to a Miami student. However, we talk to lenders all the time and no one has said they won't because students do a great job of paying back."
Knpefle said he believes the direct loan program is better for students since they do not have to choose who their lenders are, and from the school's point, of view it is a safer route as well.
"It is important for lenders to be on a school's list," Knepfle said. "Some schools have been accused of impropriety where the lender is providing something back to the school."
Knpefle said loan issues could possibly affect smaller institution's enrollment but major institutions will not feel an impact.
Xavier University does not use the direct lending program, but instead uses FFEL. Director of Financial Aid at Xavier, Paul Calme, said he does not see Xavier switching to direct lending anytime soon.
"I wouldn't foresee us in the near future (switching) unless things change in the loan market where lenders cannot get the funds," Calme said. "Until that happens we will stay with Federal Family Education Loans."
Calme said that competition that exists between the two forms of loans is good for the country and schools should not immediately jump onto the "direct lending bandwagon."
"The schools right now have a choice," Calme said. "If they don't like what is happening in Federal Family Education Loans, they can go to direct lending. So I think just the competition alone is a valuable thing to have both programs."
Calme said he is not worried about the loan program right now, but that schools should stay aware of what's going on.
"I don't think it is a crisis right now, but we need to keep ears and eyes open if there is a problem in the market with getting this capital," Calme said. "Some schools who are not as secure may have a hard time if lenders do not have the money to lend."
