By Laura Szabo-Kubitz, Research Associate

The currently proposed cut to the Competitive Cal Grant program would disproportionately affect community college students, who make up 73% of the program’s recipients. While the legislature has demonstrated its commitment to these students by keeping the program in their own version of the budget, its fate will remain unclear until Governor Schwarzenegger signs a budget, in late June at the earliest. Students who stand to lose their grants under the current proposal tend to be older, with lower incomes and higher GPAs than other Cal Grant recipients. As a result of their age, many are no longer eligible for the Entitlement Cal Grant which requires that one must have graduated from high school within the past year.

Over 69,000 financially eligible students applied for a Competitive Cal Grant by the March 2 deadline this year, and around 12,000 were tentatively awarded one. The California Student Aid Commission recently sent these recipients a postcard indicating that they may not receive their award due to the proposed budget cuts.

We recently heard from one Competitive Cal Grant recipient who had received this postcard but was confused about what it meant for her. After being rejected for a competitive grant last year – as five out of six eligible recipients are – this woman, a single mother of five who had previously gone on welfare to care for her child who was ill with cancer, was finally able to pursue her dream of a higher education.

But how can this hardworking, responsible woman make informed decisions about college if she doesn’t know how much aid she can expect to receive? How does she know whether to reduce her work hours, make childcare arrangements, or put down a deposit at the college she wishes to attend? All of this begs the question about the strength of the state's commitment to higher education and helping people improve their lives and the lives of their children by increasing their education and skills. And as this woman states quite eloquently, not only will her children’s lives improve if she is able to get an education, but the state will save money if she is able to exit the welfare system.

This woman’s story clearly illustrates students', and particularly non-traditional students', need for timely, clear, and accurate information about financial aid to make good decisions about college-going choices. For $57 million in state savings, we're taking this ability away from 12,000 would-be college-bound students who, as more highly educated individuals, are likely to give back to the state and their families in many ways as residents, employees, and parents. The stakes are too high to play budget roulette with California's future.

Posted by Edie Irons at 8:57 AM | Permalink

By Srikanth Sivashankaran, Research Associate

Vassar College's plan to replace loans with grants for students with family incomes below $60,000 was the subject of several newspaper articles last week.

Meanwhile, the University of Arizona is implementing its "Arizona Assurance," first announced in early November, to replace loans with grants for students with family incomes below $42,400. Unlike Vassar's, the Arizona initiative has not attracted much attention from major media in the last four months.

This disparity in coverage is puzzling, considering the potential impacts of the two programs: federal data show that 428 applicants for financial aid at Vassar met the income criterion of the college’s new policy in 2006-07. At Arizona, that number was 4,281 – a tenfold difference that puts the absence of public institutions from the mainstream discussion of no- and low-loan announcements into glaring perspective.

Financial aid pledges to limit the use of loans in financial aid at elite private colleges are significant. They represent real savings for some families, and a mounting consensus that an unmanageable debt burden is unacceptable. But policymakers and the media should not forget that students with family incomes below $60,000 are much more likely to attend public colleges and universities than private ones – at a rate of six to one in 2003-04 (the last year for which reliable data of this sort is available).

The University of Arizona and other public institutions that have taken steps to reduce student debt burdens for low-income students deserve due credit. See here for a full list of institutions – public and private – that have instituted financial aid pledges.

Posted by Edie Irons at 4:27 PM | Permalink

Lenders have made it clear that students with poor credit are less likely to be able to find a private student loan. Fortunately, students have good federal options. But for students or parents with good credit who decide they want a private student loan, have rates increased? Some analysts guess yes, but it is a difficult question to analyze. Unless lenders release their pricing policies (which they don't), the only way to find out if rates have, indeed, gone up is to get old and new quotes for the same person with the same qualifications for the same type of loan.

We now have two such tests, me and a colleague. My colleague got quotes from seven lenders two years ago. This month she applied again to those same lenders. The results: four offered her a lower rate than two years ago, one offered a higher rate, one rejected her, and one had suspended operations. Combined with my results, this very small sample suggests that rates are unchanged or even down for people with good credit.

There’s another way to look at this, though: What was the lowest rate my colleague found two years ago compared to the lowest offer now? By that analysis, she would pay a rate one-tenth of a percentage point higher now than two years ago. (That’s because the one rate that had gone up was the one that was the lowest before). An increase, but a very small one.

Here are the details of my colleague’s loan offers. Two years ago (April 2006) My Rich Uncle offered her a rate of LIBOR plus 2.65 percentage points; now (March 2008) the rate is LIBOR plus 4.0, an increase of 1.35. In contrast, Access Group offered her the lowest rate this time around (LIBOR plus 2.75), a full 1.2 percentage points lower than that company’s offer two years ago. The rates from Bank of America, Sallie Mae, and Citibank had all dropped by one to two tenths of a percent. Education Finance Partners mysteriously denied her a loan this time, suggesting a co-borrower, while Loan to Learn has shut down its operations.

Posted by bob shireman at 6:30 PM | Permalink

Nearly a year ago, long before the current credit crunch, I spent some time reviewing the various methods of comparing prices on private student loans. I found that the "as low as" rates advertised on comparison sites don't tell the shopper very much. I also found that it is very difficult to get an actual rate quote for comparison purposes, because you have to complete entire applications, turn over personal details, and authorize credit checks. And those multiple credit checks from potential lenders can have the effect of hurting your credit score, because they create the impression that you are desperate to get a loan.

Nonetheless, I persevered and got some actual interest rate and fee quotes, and the promissory notes to go along with them.

With all the doomsday stories about the credit crunch, we decided it was time to see if we could confirm that even someone with good credit (still me, despite tempting fate with all those loan applications) would have a tougher time getting a loan or would face higher charges. So last week I went back to two of the lenders who had offered me loans last year, National
City and Suntrust. I plugged in the same loan amount, degree program, and other details.

Their responses seemed to take a day or two longer than last year, which may be a result of some of the layoffs in the industry. But both of them got back to me with rate quotes and promissory notes. The rate at National City was higher than last year, by the equivalent of about half of one percentage point (0.25 higher interest rate, 3.5% higher fee, 20-year term). But the rate at Suntrust was exactly the same as last year: the one-month LIBOR index plus 2.5 percentage points, with no fee.

Now I'll see if I've ruined my credit rating by applying for these loans. Then I'll be able to test whether someone with bad credit can get a private loan. (Fortunately, even if my credit has been destroyed, I can always get Federal Stafford Loans because they require no credit check).

Posted by bob shireman at 1:46 PM | Permalink

By Deborah Frankle Cochrane, Research Analyst

UPDATE: We’ve looked more deeply into the issue of community college loan program participation since this post was published. Please see the issue brief, Denied, for a more thorough analysis of this issue.
------------------
No one wants students to borrow unnecessarily or to borrow too much, but students who do need and want to borrow should be able to do so in the safest way possible. That is why the federal guaranteed student loan programs were created. The federal loan programs are entitlements, meaning that they were designed to be available to all students who apply for loans.

Sure, loans are not as desirable as grants, but these aren't just any old loans. As one California community college financial aid administrator explains federal loan aid to students: "See what happens if you go into your bank and ask for a loan at the same fixed interest rate of the federal student loans. Explain that you don’t want to pay it back for a few years – or be charged interest in the meantime. And while you're at it, you want to be able to delay your payments in the future if you ever hit hard times."

Clearly, the federal loan programs provide a more generous and safe way to finance an education than private student loans that offer none of these same benefits. But what about the colleges that don’t provide access to federal student loans? In our recent report, Green Lights and Red Tape, we documented the number of California community colleges that do not participate in federal loan programs, and questioned the decision to restrict access to this important source of financial aid.

Looking at community colleges nationally, it is evident that this isn’t just happening in California: in ten states, half or more of community colleges do not provide access to federal student loans!

Some colleges withdraw from the federal loan programs because too many former students have defaulted on their loans. There is a danger that excessively high default rates over several years can jeopardize a school’s ability to offer all federal aid, including grants. But under current rules, this is not an imminent threat to most community colleges. The vast majority of community colleges do offer loans and adequately manage their default rates, which suggests that withdrawal from the programs is an unnecessary precaution.

Default rates are not the only rationale for restricting borrowing: financial aid offices often cite the need to protect students from their own choices. Their students, you see, may not fully understand the implications of borrowing. Some students, they explain, aren’t committed enough to their education to finance it through credit. We do not doubt for a minute that these sentiments reflect real aid office experiences and challenges. But if it's protection that students need, why take away the safest borrowing option, inevitably driving some towards risky private loans and credit card debt?

Students and families rely upon college financial aid offices to provide informed advice about how to finance a college education. What should they make of statements like this (from a community college financial aid office’s web site), a typical example of how non-participating colleges address loan aid?

"Currently, our institution does not participate in the federal student loan program; however, you can independently get a private loan or non-certified loan to help pay for your educational expenses if you meet the lender’s requirements."

This isn't protecting high-risk students; it's throwing them to the wolves. Students and families trust college financial aid offices to provide informed advice about how to finance a college education. Neither this message nor the restriction of financial aid options helps the low-income and high-risk borrowers who financial aid offices serve.

Posted by Edie Irons at 10:31 AM | Permalink

I graduated from college last June, and I still use my mother's house as my permanent address for important mail. I got a call from her one day yelling at me for not taking care of my student loans, because Nelnet had sent me letters with an insignia that resembled a government seal, and bright red "2nd attempt" and "final notice" warnings emblazoned on the front. I didn’t even know what Nelnet was six months ago other than "those people that keep sending me bogus offers." She couldn’t open my mail, and the "notices" kept piling up, so she was understandably concerned. The only problem? I hadn't taken out any student loans through Nelnet. They were just using scare tactics to get me to consolidate my loans through them.

Fast forward to now. I’ve been working at the Institute for four months, and since I've been here, learning about the misleading marketing practices of some lenders has prevented me from becoming a victim. I know that it’s not a good idea for my roommate to cash the check he received in the mail as an enticement to consolidate his student loans, but others might not be so aware.

A college degree does not equal a B.A. in Common Sense, much less Financial Literacy. While the entrance and exit counseling that financial aid offices provide to borrowers during college orientation, and just before graduation does not fully prepare most students for the onslaught of direct marketing they will receive about student loans, or all the decisions they’ll need to make during repayment.

New York Attorney General Andrew Cuomo's Direct Marketing Code of Conduct, would curtail many of these issues. It would prevent lenders from misrepresenting themselves as the government or as a student’s current lender. It also mandates that lenders mush inform borrowers of their federal loan options before taking out high interest private loans. Figuring out what to do with the rest of your life is surprisingly time consuming, so a little extra help from Congress would be a greatly appreciated protection on behalf of graduates everywhere.

Posted by shannon gallegos at 1:59 PM | Permalink

By Deborah Frankle Cochrane

From Massachusetts Governor Deval L. Patrick to Democratic Presidential Candidate Chris Dodd, the idea of making community college "free" has been thrown around quite a bit recently. College tuition is getting too expensive – so the affordability problem is solved, right?

Wrong. We're glad that people are thinking about ways to make college affordable, but like the music club that offers you ten "free" CDs but charges an arm and a leg for shipping and handling costs, these proposals aren’t all they’re cracked up to be. Average annual college costs at a community college add up to more than $12,000 after you factor in books, transportation, room and board, and other expenses (College Board). Tuition charges, which would be eliminated by these "free college" proposals, are only 18% of costs for a typical community college student (or only 4% in California, with the largest community college system in the country). While no college student would turn down free tuition, the price of textbooks and other educational expenses could leave students scrambling to cover the costs of "free" college.

The reality is that a student drawn in by the promise of free college is less likely to consider and apply for federal and state aid. After all, who needs aid to go to college if it’s supposed to be free? They may think they’re already receiving aid. A needy community college student with grant aid to cover tuition plus other expenses is likely in a much better position than the same student with free tuition, but no extra aid.

The message of "free" college is attractive, and we’re glad that national leaders are getting serious about making college affordable. But false promises can be hurtful if they serve to get students in the door without a way to succeed. The best way to make college free is to address true student costs and financial need by investing in financial aid for those who can’t afford it.

Posted by Edie Irons at 10:02 AM | Permalink

Iowa legislative staff interviewed Robert Shireman after his testimony to the Iowa legislature's Government Oversight Committee.

Posted by Edie Irons at 11:06 AM | Permalink