Simple Headlines for a Complex Issue

Declaring a crisis in student loans certainly makes good headlines and it's a great front page piece in April, when many families are reviewing financial aid offers and figuring out how to finance college. But, as the last quote in yesterday's Washington Post piece on the issue pointed out,

"The congressional action and the media coverage on this issue is doing a massive disservice to students and families, many of whom are concerned about paying for college already," said Luke Swarthout, higher education advocate for the U.S. Public Interest Research Group. "We know many of them are adverse to debt, and for lenders to be sending out a message of crisis in order to secure themselves a bailout potentially could dissuade families from seeking available financing options."

Of course, that didn't stop the Post's editors from using a headline that read, "Exit of College Lenders Sets Off Scramble to Fill Breach." While it's important to report on the problems many student loan companies are facing right now, it is equally as important to point out that the federal government has tools at hand--the lender of last resort program and the Direct Loan program--to address the problem. And that there are many lenders that are still offering student loans.

Another issue that often is missing from current news reports on student loans is whether it's a good idea in the first place to allow institutions to include tens of thousands of dollars in loans, especially high-interest private loans, in their 'aid' packages. The New America Foundation does a great job in this post of pointing out how the easy availability of high-cost private loans, loans that don't have a government guarantee or a fixed interest rate, has allowed colleges to raise tuitions and shift from need-based to merit-based aid (e.g., more grant money going to higher income students).

I also can't help noting that the largest guarantor of these private loans, the Education Resources Institute (TERI), filed for Chapter 11 bankruptcy protection. TERI credited their financial troubles to disappearing demand among investors for bonds backed by student loans. But you also have to wonder if investors are worried about the potential for high default rates among these private student loans in light of their recent rapid growth, particularly among students with poor credit histories and attending institutions with low graduation rates. Much like the sub-prime mortgage markets, these sub-prime student loans are ripe for default. But unfortunately for students, unlike TERI, they won't get any relief in bankruptcy from student loan debt.