Student Loan Crunch Getting Tighter
I wrote last month that the credit crunch is affecting student loan rates, and despite a few hundred billion in liquidity that has been added to the banking sector, the crunch is still with the student lenders - and the students.
Here’s what happened. Banks based their reserve limits and total asset calculations from what they expected housing prices to be. They bought a lot of bonds and securities backed by mortgages. No one really expected housing prices to come down this quickly, or if they did, they had secured their compensation package and/or personal fortune in something else. The investment banks kept chasing new investments, only using money that had been generated from the value of homes and mortgages that didn’t exist.
The first hint to the small independent investors was when AAA (triple A) bonds started going bad. These should, theoretically, be the safest private bonds available - a practically guaranteed source of interest income. In some cases, they were guaranteed by bond insurers, but well, let’s face it, the insurer can’t really afford to pay everyone - they’ve had to instead retract their classification of the security as AAA. And it begs a further question - is there a quality difference among AAA rated loans? Should there be other classifications that are more specific?
The economy has entered a strange phase of trying to figure out exactly how much money is in it and how much money is based on imaginary home values. When imaginary dollars are discovered and accounted for, real money has to go into reserve to cover that position. In short, banks don’t have any money to lend, especially not to students who need student loans!
Brazos Higher Education Service Corp, a top-four student loan holder, announced its exit from the student loan business this last week. It isn’t the first student loan company, and it probably won’t be the last. Unfortunately, even as loans should be a last resort, choices and competition help keep the prices as low as possible. If some lenders are leaving the business, others will raise prices so they can afford to stay in, or they’ll just raise prices because they have fewer rivals competing for their business.
Several public loan programs are experiencing stress, as well. The crunch is really starting to affect students, not just on private loans but also on ones that have been typically viewed as a form of financial aid.
There are surely tough times ahead for colleges, students, and the economy in general. American consumption of resources & wealth is coming into alignment with our current income and aggregated debt obligations. The result is inevitably a decline in available choices and it is the nature of debt that these costs be shifted primarily to the younger generations.
But even as an education might become harder to obtain, it will be more necessary than ever. Good luck!
No Easy Ride for Student Athletes
The NY Times published this article about two weeks ago that brought attention to the experiences of college athletes, and I wanted to comment on it sooner. You might have noticed that my posting has slowed down in general, but I’m pretty sure this is temporary.
When a lot of people think of college athletic scholarships, they imagine the star of the football team at a bowl school. Maybe some nice cars, a full ride, private tutors, whatever. The more glamorous movies might involve even more questionable perks.
The reality described in the many testimonials now floating around the internet shows something else: Scholarships that only pay for a fraction of college costs; non-stop obligations (especially into the weekend when most students are off having a good time); and a dedication to the sport and academics. Amy Reinink at the Gainesville Watchdog Blog fears some student athletes are being shortchanged, and the comments go even further to suggest the deals are terrible regardless of the individual specifics.
Well, I think if you plan on going to school and playing sports, it better be because you truly love the sport. I knew many student athletes at my college, and as a Division 3 school we didn’t have any sports scholarships worth speaking of (UNF was phasing to a Division 1 school when I left). They put in the extra hours for love of the sport, and (at least the ones I knew well) didn’t sacrifice academics. A few teams competed in national competitions, sure it was against other Division 3 schools, but when they won we cheered and when they didn’t we were all a little down.
But I say congratulations and good luck to these student athletes in high pressure division 1 colleges, even if they aren’t getting a full ride. Part of college (especially paying for it) is coming to terms with economy (the reconciliation of unlimited wants and limited resources). Student athletes on partial scholarships are demonstrating a lot of the advice I’ve given here on this site. Regardless of student interest, the key to “free college” is a lot of hard work, good grades, and excelling in your specialty or interest. One source of funding might not be enough to cover everything, so you have to seize every one available to you. Most of all: Find something you enjoy and try your hardest.
Meditation Scholarships? Why not!
One of the more unique stories in scholarship news this week was the announcement of a $1 million donation from film-maker David Lynch to fund transcendental meditation studies in order to advance the cause of world peace. A little bit of a jump? Maybe, but its money for students who want to learn something new! Of course, the issue has its friends & foes - some claim scientifically verifiable medical benefits and some claim it is little more than a new religious cult.
Transcendental meditation is a relaxation technique originally taught by Maharishi Mahesh Yogi, and it is claimed that the methods are derived from traditional Hindu texts. The religious / spiritual goal of the meditation is to achieve enlightenment through varying stages of awareness, but it also claims political benefits of peace and medical benefits from hypertension (high blood pressure) control and heart health to increasing the brain’s ability to cope with physical pain. Millions of dollars have been spent have been spent on researching the issue with varying results over the years, but it hasn’t produced anything conclusive enough to end the controversy and debate.
Speaking of peace, David Lynch had this to say about the transcendental meditation university:
“America urgently needs at least one university to teach the science of peace—and to actually promote peace in the world,”
The irony of this isn’t lost on Liberty Film Festival, who notes that finding a pro-war college campus would be the difficult part, noting the overwhelming leftward slant in higher education. All jokes aside, I’m glad to see funding for education, regardless of the program or agenda. In fact, I have a bias in favor of whatever is new or controversial. That is, after all, how all of the major breakthroughs in science began, with an observation that didn’t fit perfectly with the established belief systems. Even better that the education in the theory be free - let the believers foot the bill and if it works, the market will respond.
David Lynch is probably best known for his work on Twin Peaks, Dune, and Lost Highway so presenting people with new visions of reality isn’t necessarily new for him. Applications are available at: http://www.lynchweekend.org/scholarships/
Obama, Clinton, and McCain on Higher Education
The candidates’ plans for college and higher education are disappointing to say the least!
I mentioned earlier that rapidly rising tuition costs can be attributed at least partially to the current federal subsidy & manipulation of student loans through the Higher Education Act. As long as subsidized loans out-perform market averages in other secure investment vehicles, lenders have to keep the rates on private loans also above-market. As usual, subsidies tend to create price floors. Why would a bank settle for “normal” market returns if the government guarantees better profits?
Senators and presidential candidates Obama, Hillary, and McCain don’t have very much to say about higher education and college tuition costs. In fact, McCain doesn’t have anything to say about college at all and his “Issues” page on education focuses on accountability and expanding the No Child Left Behind program - with even harsher penalties for failing schools.
Obama and Hillary offer almost the exact same plan. Essentially, a tax cut for anyone paying for tuition. Hillary Clinton’s plan calls for a $3,500 tax credit, and Barack Obama’s plan calls for a $4,000 tax credit. From Obama’s website:
This universal and fully refundable credit will ensure that the first $4,000 of a college education is completely free for most Americans, and will cover two-thirds the cost of tuition at the average public college or university and make community college tuition completely free for most students.
The other promise they make is to “simplify” and “streamline” the federal financial aid process (FAFSA). This isn’t really news, because this has already been written into the College Opportunity and Affordability Act. If the law passes as written, IRS information can be used to “pre-populate” FAFSA forms, allowing students and parents to apply for financial aid at the same time they pay taxes.
California Bans Home Schooling
Education in America has come a long way. A few hundred years ago, schooling was limited to what a child learned at home about the family business or taking care of the family’s farm land. Specialization was rare, and limited to a few paths like metal-working or exporting. A college education, one we almost take for granted today, was limited to the extreme elite.
As the economy became more specialized, public schools for children opened up across the nation. Laws were written so that education is a right of all citizens. From a right, education would become mandatory - but at least children and parents had choices and options as to how they wanted to pursue it.
A recent court ruling in California might suggest the next legal evolution of mandatory education. Home schooling may be a thing of the past - and parents found guilty of this “crime” could face fines or criminal prosecution. The judge found that “parents do not have a constitutional right to home school their children” and has forbidden home schooling to count toward a student’s mandatory education requirement unless the parent is also certified as a teacher in the state of California.
In America, this is radical news, but in some places in Europe this has been the standard for a while now. A German family lost custody of their daughter due to homeschooling her after repeated warnings by the court, and the rationale is that this is somehow “good” for society.
A primary purpose of the educational system is to train school children in good citizenship, patriotism and loyalty to the state and the nation as a means of protecting the public welfare.
- Judge’s ruling
Unfortunately, this ruling seems to have more to do with preserving the power & interest of the state. From what I’m reading in this publicly released ruling, the motivation of the court has more to do with advancning patriotism and civic obedience. Students taught at home may not learn what the state deems important - particularly in controversial political topics.
Certain studies plainly essential to good citizenship must be taught, and that nothing be taught which is manifestly inimical to the public welfare.
There you go. You’re allowed to teach your own children - so long as you teach them exactly what they would have learned anywhere else. Not just in math and science, but in subjective topics like politics and government too.
Unemployment shows need for in-demand Education
In February, 63,000 American employees were fire or laid off, and 450,000 retired or left the job market altogether. More than 30,000 jobs were created by the government, so the total numbers of private sector jobs declined by over 100,000. Times are tough for all businesses, workers, and investors, so students need to acquire the skills in demand in a weak economy.
Health - Medical prices and demand are skyrocketing. While analysts predict that this cost and consumption growth cannot last forever, they also do not have many suggestions for how to bring prices down or serve increased numbers of patients with fewer medical workers. Job growth is not limited to doctors, nurses and other medically specialized office staff are also finding work
Education - People are realizing that their old degrees aren’t necessarily cutting it, and college enrollment is at all time highs (despite, again, higher than ever prices for tuition.) Also, even though state governments are facing budget shortages, the number of teachers is typically growing or holding steady and cuts are being taken out of bonuses or administrative budgets.
Information Technology - Although a lot of jobs in IT have gone to India or elsewhere, many careers in IT have been growing here in America, too. Knowledgeable IT workers are needed to manage international teams, conduct data security, and/or serve as a personal representative to clients and corporate executives. This field isn’t necessarily as secure as it once was, but it is still very needed in our modern computer information economy.
Science & Engineering - For a long time, America has faced a shortage of science majors and engineers (of all types). Pay is higher than most graduates, and it is a type of job that can create real growth in a company - allowing a company to create even more jobs and expand its production. Science isn’t just good as a personal career path, it contributes to the macro-economics of society as a whole.
Of course, it is possible to make a career out of any major or subject you’re interested in. In some ways, its easier to get ahead in a field that you like, but on the other hand the demands of the market play a major part in which jobs are most highly financially rewarded.
Florida Committees Recommend $357 Million in Education Cuts
With the recent “Amendment 1″ tax cut and falling home and property values, Florida’s state legislature faces one big challenge in terms creating a budget for the coming year. Declines in consumer spending are affecting sales tax revenue as well.
The legislative session has only just begun, but committees have already recommended budget cuts in education totaling $357 million. Teacher bonuses would be halved and its even possible that they will not get an annual raise. The large part of the spending reductions will come out of K-12 classes, but public colleges and Pre-K programs would also be affected under the current proposal.
The total loss to the schools would be more than 1.0% - 1.2% of current-year funding. Such a cut would undo the last few years of increases - and put education outlays at an inflation-adjusted level much lower than recent years.
The bills are expected to go to the floor of the legislature today or tomorrow, so I will keep an eye on things as they develop and post any further updates here.
Pay off student loans, or invest?
When recent college graduates work on creating a first budget, one issue that may come up is choosing between paying off principle on student loans or putting that money into investment or savings. The problem is that there is no simple answer, and even after all of the known variables are considered, one still has to guess or approximate the expected return on their investments and their personal willingness to take financial risks.
First of all, its a good thing to have some cash in the bank for emergency situations like injury or losing a job. A common rule of thumb is to have enough money to make it through about two months worth of fixed costs (rent/mortgage, food, utilities, and monthly credit payments).
- The problem with non-cash savings is that they can be difficult to convert into money instantly - bonds have to mature, real estate can sit on the market unsold, and stocks could be at a temporary low and selling at a forced time could cause a substantial loss
- The benefit is that these are the true vehicles to building wealth since cash is a constantly depreciating asset. Every day it seems, the dollar loses just a little bit of value and prices creep up.
Once you have some cash saved up to cover emergency and unexpected situations, its time to consider the non-liquid investments listed above versus student loan balances and interest.
- If the student loan is subsidized, chances are that your best bet is to just make the monthly minimum payments and forget about it. Most investments, even safe ones like government bonds, can get a better interest rate than what you’re paying to the student loan. It might just be 1 or 2% difference, but over the life of the payments you could earn thousands more from investing than you saved by avoiding the almost non-existent interest fees.
- If the student loan is private, the interest rate of the loan and your willingness to take investment risks determine your best outcome.
- Private loans to low income students or students in a family with a low credit rating can be at 10% or higher. If this is the case, you would almost certainly want to pay that principle off before investing. It is not impossible to get a 10% return in our modern bubble-oriented economy, but it is extremely risky. Unless the loan has pre-payment penalties, its a much safer decision to pay the debt as soon as possible. Even if it does, it may be worth it to pay the penalty to avoid the even higher interest bill.
- Private loans to students with high family incomes and/or good credit ratings are the ultimate gray area. The 5-7% interest rates are right in line with returns you could expect from fairly safe investments like certificates of deposit or moderate-risk mutual funds so you’ll have to base the decision on things like tax credits, and whether or not your employer matches any of your contributions to a 401k or similar investment plan.
Compounding interest is a powerful financial force, and based on your own personal situation it may be better to approach the debt side or the investment side as a top priority. All of these variables have to be considered, and even then there are risks that an investment in a particular company, fund, or any asset could lose its value due to some unforeseen change in the economy. Then again, if the dollar devalues too much, there is a risk that paying off your college debt could also backfire, financially.
College Opportunity and Affordability Act of 2008: Loans and Grants
H.R. 4137 was passed by the House of Representatives earlier this month, and is pending committee review and a potential vote in the Senate before possibly being sent to whoever is president at that time.
The bill has been moving slowly since its introduction in 2007, and it seems to have a particularly low priority because Washington is using its press time to cover security for Britney Spears and the medical habits of Roger Clemens. Obviously, Congress’ priorities aren’t in higher education right now, but this “College Opportunity and Affordability Act” could be a good way to fix problems left by last year’s major cut in federal student loan spending. Based on the press release that went forward a day before the Congressional vote, these are the suggested talking points:
- Students can pay off principle on college loans early without any early payment penalty
- Student borrowers can cancel a private loan with in three days of signing
- Student lenders must inform a student of eligibility in federal programs before signing a private loan agreement
- Student lenders must make all optional loan terms available for the student’s consideration and clearly define the technical terms of the loan such as interest rates, required monthly payments, fees, and charges.
The rest of the “official” talking points were previously addressed in the Student Loan Sunshine Act of 2007 but there is a lot in the current bill that isn’t covered by the press release.
Essentially, the bill would open up a huge line of credit to the student lenders participating in the program by raising the maximum loan amounts on all subsidized programs. This is mostly done by raising the amount of a federal loan that can be spent on each section of costs, like books, fees, tuition, etc… but it also increases direct aid to students in the form of larger Pell Grants.
Although the bill provides increased liquidity to banks in the form of higher loan limits, it also provides students a way to work off that debt through work repayment student loan forgiveness programs. These programs cover a wide range of majors and careers, and recent revisions of the bill have added even more careers eligible for debt repayment, including physical therapy.
There are several reasons why this bill is moving slowly through Congress, and one of them is probably the scope and ambition. Almost every section of the Higher Education Authorization Act is visited, and issues from across the board are addressed, like:
- military members receiving in-state tuition ;
- assisting students with disabilities ;
- financial incentives to colleges and universities that can maintain low tuition costs.
While the program will cover some gaps created by last year’s legislation that reduced funding, the bill would also create an extra burden on the government’s annual budget and projected deficits. This funding shortfall is another reason why Congress may be reluctant to push this bill forward quickly or publicize it heavily in the media.
If it does get signed into law in a timely manner, the College Opportunity and Affordability Act of 2008 could be affecting the financial aid and student loan process as soon as June 2008 for students applying for the 2008-2009 school year. Of course, even if Congress does act quickly and submit the proposal, president Bush would still have the opportunity for a partisan showdown or possible veto.