Today, Senator Edward M. Kennedy, Chairman of the Senate Health, Education, Labor and Pensions Committee, sent the following letter to David Ward, President of the American Council on Education, the major coordinating body for all the nation's higher education institutions, urging institutions to take steps to ensure students do not turn to high-cost private loans before exhausting more beneficial federal loans and grants. He also urged schools to enroll in the Direct Loan program as a backup for their students - even if they choose not to use the program if they end up with sufficient access to private lender loans.
As more and more students turn to non-federal, private loans to help finance their degree, the Department of Education estimates that 40 to 60 percent of students who borrow non-federal private loans are not taking advantage of all the federal grants and low-cost loans for which they are eligible. Kennedy urged schools to ensure that students and parents are aware of these federal options before turning to higher-cost private loans. In addition, he urged colleges and universities to register to participate in the Direct Loan Program, even if they choose not to use the program now. The Direct Loan Program does not rely on capital from the volatile private markets, and is a stable, reliable option for schools to ensure that students can continue to access federally-backed loans regardless of the actions of private lenders.
Kennedy's letter also detailed the steps he has taken to reduce students' reliance on high-cost private loans and to ensure continued access to federal loans. Specifically, Kennedy outlined legislation he introduced two weeks ago - which was passed unanimously by the House Committee on Education and Labor last week - that would increase federal loan limits for students and shore up the federal loan programs to ensure that students and families continue to have multiple options for financing college, whether they choose to borrow federal loans directly from the government or from private lenders through the Federal Family Education Loan Program.
"The turmoil in the credit markets has become a crisis for some lenders - the question for Congress is how to prevent it from becoming a crisis for students." Kennedy said. "The ability of families to afford college should not be determined by the quarterly earnings of banks. Greater access to high-cost, private loans is not the answer; we must strengthen the federal loan programs to ensure increased and continued access to lower-cost options for families. The legislation I introduced, and that was passed unanimously by the House Committee on Education and Labor last week, will ensure that students and families can continue to secure the funds they need for college this fall, even if the situation should take a turn for the worse. The Direct Loan Program remains the most stable option for students since it does not rely on capital from the volatile private markets. The Department of Education should ensure that is an option for every school. My legislation also takes steps to ensure that private lenders will continue to be able to participate in the federal loan programs to provide multiple options for students and families. I am hopeful that the Senate will act swiftly to enact these provisions to reassure students and families."
Following are a copy of the letter Kennedy sent to David Ward and a summary of his legislation, the Strengthening Student Aid Act of 2008.
Letter to David Ward, President of the American Council on Education:
April 15, 2008
American Council on Education
One Dupont Circle NW
Washington, DC 20036
Dear Mr. Ward,
As you know, families around the country have been affected on many fronts by the recent turbulence in the economy. Now some families are becoming concerned that the loans they rely on to afford college may be at risk. We have not yet heard of students having problems obtaining federal loans at this point, but we cannot allow problems in the credit markets to prevent students from going to college. We in Congress are doing all we can to strengthen the federal loan programs to make sure that students and families continue to have timely, uninterrupted access to student aid. I'm writing to thank you for all you are doing to help institutions, students and families at this challenging time and to recommend two additional steps that institutions may want to consider. I hope you will call on my office if we can be of any assistance, and that you will encourage college and university presidents and financial aid officers to do the same if we can provide help to them or their students.
In recent weeks, I've been in contact with the Secretary of Education to urge her to take all steps within her authority to guarantee that the backstops in current law are in place and operational in order to protect students from current problems in the markets.
I've urged Secretary Spellings to make it as easy as possible for colleges and families to participate in the Direct Loan Program. I've also urged her to strengthen the FFEL program, by putting in place a plan to activate the "Lender-of-Last-Resort" program, which enables her to advance capital to designated lenders and guaranty agencies, to help students having trouble finding loans through other banks.
But there is more we can do. Recently, I was joined by five of my Senate colleagues in introducing legislation to provide additional protections and assistance for students and families. The Strengthening Student Aid for All Act (S. 2815) will reduce the need to rely on higher cost private loans by increasing grant aid for the neediest students, expanding federal loan limits, and making low cost federally-subsidized loans to parents more attractive. The bill also ensures that the federal government shores up the FFEL program so that it can continue to operate if the problems in the capital markets unexpectedly worsen. Chairman Miller has introduced similar legislation in the House. Attached is a summary of the legislation, we welcome any thoughts and suggestions you or your institutions may have.
I also urge you to encourage colleges and universities to register to participate in the Direct Loan program. Registration does not commit them to use the program. Even if they do decide to participate in the program, it does not preclude their participation in the FFEL program at the same time or at a later date. The Direct Loan Program provides a stable, reliable source of resources for students and families. It relies on funds from the U.S. Treasury and is completely insulated from the volatility in the credit markets. Currently, over 1,150 schools participate in the Direct Loan Program, and over 800 more have signed up so that they can choose to use the program if their students begin to have problems obtaining federal loans through private lenders. I've encouraged the Secretary of Education to develop an expedited process to assist institutions in enrolling in the program, and she's assured me that the Department has streamlined the process significantly. The Direct Loan program can be an effective safety net for students, and assure stable access to federally-subsidized student loans.
For students who rely on more expensive private loans, I recommend that you urge schools to see that students and parents are taking full advantage of the assistance available to them under the federal grant and loan programs, before turning to higher-cost private loans. According to the Department of Education, as many as 40 to 60 percent of students who borrow private loans have not fully exhausted their eligibility for federal assistance. In addition, as parents begin to face difficulties in obtaining home equity lines of credit and other sources of financing that may have been available in a more stable economy, I hope institutions will remind them that they are eligible to borrow parent PLUS loans up to the cost of attendance, and that the federal government does not require them to fill out a Free Application for Federal Student Aid to do so. We are taking steps in the reauthorization of the Higher Education Act to ensure that private lenders act in good faith to make students aware of their federal options first, and hope you will encourage schools to assist in these efforts.
I thank you and your institutions for all you do to assist students and families in meeting the costs of college. In today's knowledge economy, few things are more important. I encourage you and the colleges and universities you work with to contact my office if students begin to have problems obtaining student loans, and I very much hope that you will share any suggestions you have about additional steps that Congress should take to protect students and families in today's uncertain economy.
With respect and appreciation,
Edward M. Kennedy
Summary of the Strengthening Student Aid Act of 2008
Senator Edward M. Kennedy
Reduce the need for students to depend on non-Federal, higher-interest private loans by
· Increasing annual limits on unsubsidized Federal student loans for dependent undergraduate students by $1,000 each year, with a new aggregate limit of $29,500 (up from $23,000). Loan limits will increase as follows:
o First-year students: $4500, up from $3500;
o Second-year students: $5500, up from $4500;
o Third-year and beyond: $6500, up from $5500.
· Increasing annual limits on unsubsidized Federal student loans for independent undergraduate students and dependent undergraduates whose parents can't obtain parent PLUS loans by $2,000 each year with a new aggregate limit of $57,500 (up from $46,000). Loan limits will increase as follows:
o First-year students: $9500, up from $7500;
o Second-year students: $10,500, up from $8500;
o Third-year and beyond: $12,500, up from $10,500.
Improve federal Parent (PLUS) loans so they are more attractive than private educational loans and home equity lines of credit by
· Allowing for deferral of repayments on parent PLUS loans while the student for whom the loan was taken out remains in school (currently, parents are required to begin repayment of PLUS loans within 60 days of loan disbursement, even if the student for whom the loan is taken out is still in school).
Reduce low income students' dependency on student loan borrowing by
· Increasing Pell Grants for the lowest-income students by authorizing a "negative Expected Family Contribution," which would allow the maximum Pell Grant ($4731 for the 2008-09 academic year) to be increased by up to $750 for students whose expected family contribution is calculated under federal needs analysis to be a negative number, and for those students whose expected family contribution is automatically determined to be zero.
Ensure the availability of Federal student loans by
· Requiring the Secretary of Education to designate guaranty agencies to be a Lender of Last Resort (LLR) on a school-wide level at the institution's request. Currently, LLRs are provided to individual students who are unable to obtain a loan through the Federal Family Education Loan Program. At many colleges, large shares of students have Federal education loans with the same lender. Colleges whose primary lender stops making new loans should have the assurance that a LLR will be ready to step in to offer loans to all of their students; and
· Clarifying the Secretary's authority to advance funds directly from the Treasury to LLRs, without needing a new appropriation by Congress.
Provide additional options for lenders to access capital to make new loans, should the credit market situation continue, by
· Allowing the Department of Education to serve as the secondary market of last resort for loans originated in the FFEL program. Under this provision, the Secretary of Education would be required to buy FFEL loans that lenders want to sell, and would pay a price equal to par (100% of the outstanding principal and any accrued, unpaid interest on the loans) plus a premium equivalent to the cost of originating such loans in the federal Direct Loan program. The terms and conditions on the loans would remain the same as they were when the borrower took out the loan, and the Secretary could contract with the same servicers who previously serviced the loans to ensure a seamless transition for borrowers.