KENNEDY ON CREDIT MARKET SITUATION AND STUDENT LOANS
Americans are anxious about their economic futures. They’re seeing volatile markets, disappearing jobs, home foreclosures, rising debt, and declining benefits. Now the crisis in the credit markets stemming from irresponsible lending practices in the mortgage industry may impact their ability to secure student loans at fair rates so their children can go to the college of their choice.
We all know that student loans are critical for millions of students and parents trying to pay for college. In the last twenty years, as the cost of college has tripled, more and more students are relying on student loans to afford a college education.
In 1993, less than half of all graduates had to take out loans, but in 2004, nearly two-thirds had to take out loans to finance their education.
The average student in the US graduates with more than $19,000 of student loan debt.
Last year, we passed legislation that increased grant aid and ensured that federal loans were cheaper for students by cutting interest rates. We also ensured that no graduate would have to pay more than 15% of their income in monthly loan payments and that those who enter public service will have their loans forgiven. But these benefits will be meaningless if students cannot access the loans they need to be able to afford the college of their choice.
In recent weeks, the credit market crisis has made it more difficult for student lenders to secure capital. This has increased the cost of lending, causing some lenders to pull out of the student loan market and causing those operating outside the federal loan program to cut back on lending to high risk borrowers.
Due to the attractiveness of the federal guarantee in the federally subsidized program—so far—other lenders are stepping up to fill in the gaps in that program. And the interest rates in that program are capped so students are protected from inflated interest payments.
But students who need to go beyond the federal loan program will have a tougher time finding lenders and their rates will go up in the fall.
Schools are beginning to sound alarm bells and telling students to get their loans now because they may be less available in the fall.
We must take action to ensure that students have the resources they need to attend college.
We must ensure that the backstops built into the federal loan program designed to protect students and parents from the kind of credit market disruptions we’re seeing today are ready to be implemented.
One of those backstops is the Direct Loan Program. It allows students and parents to borrow directly from the Federal government – without going through a bank. The Secretary of Education uses funds from the U.S. Treasury to make the loans. This program does not rely on capital from the private financial markets, so it’s completely insulated from the disruptions the market is experiencing today.
Current law also allows the Secretary to advance capital to designated “Lenders-of-Last-Resort” so they can step in if students are having trouble finding loans through other banks.
These programs are already in the law. And nearly 2,000 colleges are already either using or signed up to use the Direct Loan Program. Last week, I wrote to Secretary Spellings urging her to take any necessary action to ensure that schools that rely solely on private banks can easily access the Direct Loan Program, and to ensure that procedures are in place to set up lenders of last resort. I would like to ask unanimous consent that the letter be submitted for the record.
We must also ensure that students who are borrowing outside the federal loan program are protected.
A good first step is to make parents and students aware of their options. According to the Department of Education, many students who turn to private loans – high-cost loans that are not subsidized by the federal government – are not taking advantage of the grant aid and low-interest loans they are eligible for under federal programs. This is unacceptable. We need to make sure college financial aid advisers are getting students the information they need to maximize student aid and get the best deals on their loans.
We are currently in conference with the House on the Higher Education Act. That bill will ensure that we do just that. It will help students make the most of the college aid they’re eligible for by requiring lenders to disclose – on private loan applications and the documents they sign before a loan is made – that students may be eligible for grants from the federal government, their state, and their college, as well as lower-cost loans from the federally subsidized program. We also require additional counseling by financial aid experts for students regarding their student aid options.
For families who need additional loans beyond federal loans while they are in school, we must ensure that they can access loans at affordable rates in the private markets. We are working with our colleagues in the Banking Committee – led by that Committee’s Chairman – Senator Dodd – on this issue. I plan to offer legislation that will expand edibility for low-cost government loans for these students.
In the coming weeks, the Committee that I chair which deals with education issues will convene hearings so we can hear directly from those affected. We will also continue to monitor the Department of Education’s efforts to implement the existing safeguards in the federal programs.
In today’s uncertain economy, Congress has an obligation to provide a steady hand and to shore up programs on which Americans depend. Nothing could be more important than ensuring that families can afford a college degree.
