The Student Aid and Fiscal Responsibility Act, which was included in the health care reconciliation bill that was enacted last month, directly impacts higher education financing programs guaranteed by the federal government. This legislation eliminates the Federal Family Education Program and replaces it with the Direct Loan Program effective July 1, 2010. It also increases the maximum Pell Grant, starting in 2013 to 2017, at the same rate as the consumer price index.
While this legislation does eliminate private lenders from participation in federally guaranteed loan programs, it does not impact the private student lending programs that many banks, and most recently credit unions, provide in an effort to bridge the funding gap that many families face once all of their federal aid and grants are exhausted.
For many credit unions that have not offered a private student loan program, this new legislation could be very positive news. The majority of private student loans have been underwritten by large banks and Sallie Mae. Since many of these institutions were also FFELP lenders, they enjoyed a government subsidy since they used some of the same sales, service and technology infrastructure to support both their federal and private student lending programs. The elimination of FFELP evens the playing field for credit unions that are interested in entering the private student lending market.
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In addition to the elimination of the FFELP and the Pell Grant funding increases, the recent legislation also includes the following government funding increases to improve college affordability.
$750 million to bolster college access and completion support for students. It will increase funding for the College Access Challenge Grant program, and it will also fund programs at states and institutions that focus on increasing financial literacy.
$1.5 billion to strengthen an Income-Based Repayment program that currently allows borrowers to cap their monthly federal student loan payments at 15% of their discretionary income.
$2.55 billion in historically African-American colleges and universities and minority-serving institutions to provide students with the support they need to stay in school and graduate.
$2 billion in a competitive grant program for community colleges to develop and improve educational or career training programs.
The recent increases in government funding are a positive for the more than 16 million students that are expected to enroll in colleges across this nation this coming fall. However, many industry watchers have noted that with record-breaking enrollment statistics paired with increased college tuition costs, the need for U.S. families to seek alternative sources of funding will continue to grow. Historically, students and their families could tap into home equity, family savings or perhaps a college savings plan. However, depressed real estate prices and record unemployment have severely impacted these options for the foreseeable future placing continued demand for economical private student loans.
Credit unions are fairly recent entrants into the private student loan business. It is estimated that approximately $150 million of private student loans were originated by credit unions for their members in the 2008-2009 academic year. While this is a small fraction of what is estimated at $12 billion of origination volume in that same period, it is a great development for students.
Credit unions continue to offer a better alternative for students and their families seeking affordable private student loans.
A private student loan program provides credit unions with the opportunity to service their existing members in need of college education financing while providing a channel to develop new Gen Y members. Given the complexities of college education financing, private student loan programs should be combined with a comprehensive financial literacy program. Credit unions have the opportunity to reach out to their members who have children in high school and begin the process of educating them on college education costs, the financial aid process, filling out the FAFSA forms and providing information on college education funding options.
This program need not stop after college enrollment. Once a student obtains a loan it is important to keep them informed of how much money they owe and what their private student loan payments will cost them once they go into repayment.
As student enrollments increase and their need for higher education funding continues, credit unions can mirror and expand the benefits of the new legislation. By offering private student loans, especially programs that include a financial literacy component and rate reductions for excellent academic achievement, credit unions can provide even more benefits and a highly beneficial new program, which will not only benefit current members, but help them attract new, younger members for life.
Vince Passione is CEO and founder of Fynanz. He can be reached at 800-881-8985 or [email protected]
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