Student Loans Threatened, UMD Director Tells Congress

By VEENA TREHAN, Capital News Service

WASHINGTON (March 15, 2008) - The nation's financial woes are already putting a strain on families trying to pay for a child's college education, and current government contingency plans are untested, said a Maryland financial aid officer.

The director of student financial aid at the University of Maryland, College Park, Sarah Bauder, joined Education Secretary Margaret Spellings in testimony before the House Education and Labor Committee.

The committee is trying to find ways to ensure low-cost federal financing remains available to students should credit continue to tighten.

At risk is the Federal Family Education Loan Program, a lending program that provides 80 percent of the federal loan volume through 2,000 lenders. The other major federal program, the Direct Student Loan Program, makes the other 20 percent of loans straight from the Department of Education.

The problems in mortgage banking have led to credit deteriorating across the municipal bond and commercial markets.

While there is no known incidence of a student being rejected for federal loans for which they qualify, several lenders have stopped making new loans, according to information from the hearing. Federal lawmakers fear more lenders will follow, leaving some students without sufficient federal financial aid when demand peaks in the July-August period.

Bauder said the combination of cuts to two federal loan programs of $2.5 million, and reduced parental access to home equity and retirement money are already having a detrimental effect.

"As bricks in a wall, in and of themselves, they are inconsequential," said the University of Maryland loan processing worker of over a decade. "Taken together they build the wall."

As a result, she said, a 2008 freshman resident student with no expected family contribution would need private and other financing of $3,608 - about $2,770 more than just a year ago.

Evidence of the financial difficulty is apparent on campus now, she said.

This year saw a slight increase in the denial of credit-worthy loans. The number of appeals also rose by 12 percent after remaining flat for a number of years, though this could be explained by 2009's 20 percent jump in applications.

At the hearing, committee members sought assurances that the Department of Education had an operational plan, similar to one developed in 1998, should student federal loan credit deteriorate quickly.

That past plan established guaranty agencies that could tap federal funds from the department on an emergency basis.

It became clear that there is no such plan. Spellings said her department was monitoring loan volume and preparing guidance for lenders, but she said she has not yet met with the Treasury Department to assure funding.

Bauder said she was surprised at the heavy reliance on an untested, largely unknown program.

"I only heard of the lender-of-last-resort program yesterday though I've been in financial aid for 20 years. It's a little nerve-wracking we're betting our mission on something that's not tried and true."

Congress is also looking at pre-registration of colleges so they can move quickly from federal family programs into the direct loan program, which is 100 percent guaranteed by the government, at a moment's notice.

Iowa State University's Financial Aid Director Roberta Johnson testified the direct loan program is simpler. Spellings testified that it could soon be doubled. But Bauder called the transition from federal family program to direct loan "cumbersome."

"There is no easy way to switch. It would take a year to be transparent to students," she said.

Committee Chairman George Miller, D-Calif., said the Education Department needs to coordinate and accelerate planning.

"We need to move from monitoring to sitting down with those concerned --the guarantor agencies and the schools."

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