Financial turmoil disrupts student loan industry

Reprinted from AOA News, April 14, 2008

New regulations and widely publicized turmoil in the financial services industry are making federally guaranteed student loans more challenging for students to secure with the lender of their choice, according to the American Optometric Student Association (AOSA) and Student Assistance Foundation (SAF), AOA's partner in the student loan industry.

Students who plan to attend schools and colleges of optometry this fall should begin evaluating current lender programs and arranging any necessary student loans now, the AOSA advises.

"Students will need to do some research in order to determine their best option for obtaining student loans for the 2008-2009 academic year," said Don Oliver, executive vice president of sales and marketing for nonprofit SAF, which administered the AOA Advantage student loan program for five years.

The program has been suspended due to the passing of new legislation and because of the uncertainty in the financial markets. The AOA is seeking new options for students.

"While this may seem daunting, the situation isn't impossible and help is available," Oliver said.

Some lenders, including some banks, reportedly plan to stop issuing student loans under the Federal Family Educational Loan Program (FFELP) after June 30.

According to Oliver, the student loan industry began to change in October 2007 following the passage of the federal College Cost Reduction and Access Act.

The purpose of the act was to decrease college costs for students, increase federal programs directed toward improving access to college, and to implement school and lender regulations directed toward ensuring that students have more choice in selecting loan providers.

However, Oliver explained, the act required significant increases in loan fees and decreases in returns to lenders totaling $20 billion in order to pay for the changes to the FFELP. As a result, student loan companies across the country were prompted to evaluate all of their student loan products and the profitability associated with them.

Some lenders found their profitability levels to be marginal at best and chose to discontinue offering FFELP consolidation loans. Others chose to leave the student loan industry altogether. To date, lenders who chose to leave the industry represent 10 percent of the Stafford and PLUS loan volume and 30 percent of the consolidation loan volume.

In recent months, the "meltdown" in the real estate mortgage market compounded the problem as its effects began to impact other segments of the financial market, including college loans, Oliver said.

As a result of massive mortgage defaults, a number of the nation's largest financial institutions have had to write off billions of dollars in bad debt, leaving many with markedly less capital to invest in college loans, Oliver said.

Many of these financial institutions and major investment banks have traditionally been among the largest purchasers of the bonds issued to fund student loans.

Specialized education lenders, who rely on the secondary markets to fund federally backed student loans across the nation, have less cash available to lend as a result. In addition, the cost of funding student loans in these markets has exceeded the revenues lenders now receive on student loans, Oliver said.

According to Oliver, that means optometry students seeking loans may now find lenders to be offering minimal borrower benefits on FFELP loans and higher interest rates and fees on private educational loans. In addition, consumers may be subject to tougher criteria to obtain private loans than in the past.

"We encourage students to contact their lender early - whether that is a local financial institution or national student loan provider - to make sure they will be offering student loans this year," he said. "If not, it's time to start doing some research. A number of options are available."

One option, Oliver suggests, is for students to contact nonprofit student loan providers or higher education financing agencies in their home state or the state in which they are attending school. Often these providers offer special benefits to students who meet their criteria.

Beyond that, Oliver said, students can investigate the loan programs offered by major "money center" banks such as US Bank, Bank of America, or Wells Fargo. Such financial institutions do not primarily rely on the secondary financial markets to fund student loans and generally are still participating in the FFELP program.

However "in order to secure the most advantageous loan, students need to take the time to read the fine print associated with student loan offers - make sure the borrower benefits advertised extend to the academic year for which they need the loan," Oliver emphasized.

In addition, he said, the U.S. Department of Education is prepared to step in as a "lender of last resort" should the situation in the industry become too dire.

Responding to student loan uncertainty

The AOSA suggests optometry students consult the financial aid officers at their schools and colleges, who have a thorough understanding of the financial aid process and can provide realistic advice about funding possibilities, according to AOSA President James F. Hill, a third-year student at the University of Alabama-Birmingham School of Optometry.

The AOSA is in the process of developing a package of information of its own to help students assess loan options. SAF offers AOSA members information on assessing student loan options through a toll-free telephone service (866-408-LOAN), and online at www.safservices.org and www.StopTheDeception.org.

In the wake of the disruption in the student loan and financial markets, the AOA has suspended its AOA Advantage program, which offered refinancing of student debt for optometry school graduates. However, AOA Chief Financial Officer Robert Broderick and SAF are researching an arrangement under which the AOA Advantage program might be reinstated.

Updates regarding AOA Advantage will be posted on the program Web site at www.AOAAdvantage.org.