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Are federal student loans endangered? Is there a crisis? In a word: No. There is absolutely no danger that students will be unable to obtain federal student loans.
Numerous stories have been popping up in newspapers and other media warning that the current turmoil in the financial markets, fueled by subprime mortgages and the resulting credit crunch, will affect the availability of student loans. The implication is that students will suffer unless there's a quick federal bailout.
The inference, however, is wrong. While the tightness in the financial markets has made it harder for a small number of lenders to raise money for their private student loans, it has not affected the availability of federal loans through which the majority of students finance their education.
By law, students get those loans without credit checks and at virtually zero risk to the lenders because the government reimburses the lenders for any loan defaults. Currently, there are over two thousand lenders participating in the Federal Family Education Loan (FFEL) program, and many like JP Morgan Chase are expanding their student loan programs. In fact, the Secretary of Education wrote to college presidents last week to assure them that there will be no access problems relative to federal loans.
Should serious disruptions develop in the FFEL, by law the Department of Education is required to take up the slack. In fact, the Education Department runs its own Direct Loan program in which any school can participate. Direct loans are managed directly by the Department and, by eliminating the subsidized middlemen, have proven to be a far better deal for the taxpayers while providing the exact same loans to students.
Or, nearly the exact same loans - Stafford loans obtained through the Direct Loan program have additional, attractive repayment options.
Only the Direct Loan program offers income-contingent repayment for student borrowers. Those who choose this option when taking out a loan have the assurance that their payments will always be affordable because repayment is automatically lowered for those with lower incomes, whether due to a tight job market or employment in an entry-level job, in the public sector or at a non-profit organization.
Additionally, the Direct Loan program has an option which can wipe out some of the student loan debt of those taking lower-paid public service jobs.
When you get right down to it, students have no reason to panic. Turmoil in the financial markets is inconveniencing some lenders, but students should hardly notice.
Before policymakers rush to the aid of a few private entities, they need to keep in mind that in any given market some firms will prosper and some will fail. Congress has a responsibility to ensure students' access to federal aid - and by all accounts, that access remains unabated. We should not allow the isolated financial problems of a handful of private companies to stampede us into making unwise changes.
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