Opportunities for equitable access to college are harder to come by than ever, with the shift in federal aid policy moving from grants to loans, the passing of the College Cost Reduction and Access Act of 2007 (CCRAA) and the collapse of the consumer credit markets.
These three factors are certain to affect anyone seeking financial aid for college tuition and create a perfect storm for the already troubled loan industry, which is towing millions of borrowers now dependent on loans to finance their college education. Yet, it will be students from middleand low-income homes — largely Blacks and Hispanics —who will be hurt the most, lacking the resources to adjust to the increased financial burden they will be forced to carry.
In the ’70s and ’80s, with the federal government committed to increasing educational opportunities, most federal aid policies were designed to increase access to college for students who couldn’t afford a college education. Since that time, however, the federal government has decreased its investment in grants and favored loans instead.
The most recent College Board data bear proof: From 1996-97 to 2006-07, total federal grants for undergraduate students adjusted for inflation grew by 83 percent ($9 billion to $16.5 billion); total federal loans grew by 51 percent ($25.8 billion to $39.1 billion); and state and private loans grew by a staggering 854 percent ($1.6 billion to $15.7 billion). In short, the federal government distributed $97 billion in aid to undergraduates from all sources except from the state and the private sector. At the same time, students borrowed almost $16 billion from state and private sources to bridge the shortfalls to finance their college education.
The CCRAA, effective October 2007, had a large effect on lenders, and slashed approximately $19 billion in subsidies, while lowering its guarantee from 99 percent to 95 percent. Because the subsidies and the federal guarantee have decreased and loan defaults have increased, lower profit margins for lenders have resulted.
Adding to the mix, the collapse of the housing market in 2006 and 2007 hurt the entire credit market. Student loan pools traditionally auctioned on the secondary market to allow lenders to raise capital in order to continue making loans have, in effect, dried up. Investors, skittish about the housing market collapse, grew concerned with the potential losses from student loan defaults and lost their appetite to invest in student loan pools.
The combined effect from the CCRAA and the consumer credit crunch means less profit for lenders, higher losses from loan defaults and lack of capital for future loans.
What’s next? Smaller lenders will exit the marketplace because of their inability to profit, raise capital and sell loans. Larger lenders, who have a diverse revenue stream to grow their student loan market share, will raise internal capital to do so. However, because large lenders’ profit margins are still lower from CCRAA provisions, they will increase fees and decrease discounts, while driving up the minimum balances required for loan consolidations, resulting in the marketing of private student loan offerings versus the less profitable guaranteed student loans. And they’ll be steered to loan product offerings not in their best interest, but that of the lender.
Borrowers with bad or poor credit, students with small loan balances looking to consolidate and low-income students — primarily Blacks and Hispanics — will suffer the most. According to the 2005 Current Population Survey Annual Social and Economic Supplement, Black and Hispanic households had the lowest median income in 2004 ($30,134 and $34,241, respectively), while Asian and non-Hispanic White households had the highest median income ($57,518 and $48,977, respectively).
A recent report published by the University of California, Los Angeles’ Higher Education Research Institute showed that entering college freshmen are increasingly coming from higher median income families. In 2005 freshmen reported median family incomes 60 percent higher than the national median compared to median family incomes of 1971, which were 46 percent above the national median.
It’s time for the federal government to make some changes. Policy makers can reaffirm their commitment to educational opportunity by considering the following policy options:
• Shift the financing of college from loans back to grants;
• Explore how to make loans worthwhile for private lenders by amending the CCRAA;
• Provide tax credits or financial incentives to lenders who make loans to low-income students with poor or bad credit;
• Provide direct student loans and constrain the private student loan market;
• Require financial institutions to give back to their communities by providing student loan offerings to low-income communities as part of their community reinvestment obligations as is the case for banks under the Community Reinvestment Act of 1977.
As the economy continues its march towards economic recession, we may have come full circle regarding federal aid policy. This should be a clarion call for a renewed commitment to educational opportunity at the federal level.
— Dr. José Luis Santos is an assistant professor at the University of California, Los Angeles’ Graduate School of Education and Information Studies and a 2007-08 fellow of The Sudikoff Family Institute for Education & New Media.
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