A Financial Aid Shake Up

Last Friday, FastWeb, a free, online scholarship search service, released the results of a survey it conducted on student borrowing, showing that half of students applying for private loans, parent PLUS loans, and home equity loans were denied access to funds. If this number is accurate, it means that a large number of students will need to adjust their college choices--from a private to a public institution and from a 4-year to a 2-year institution--because of financial constraints.

There's good reason to be skeptical of FastWeb's high numbers--the survey was sent out to users of the website (people already looking for additional financial aid) and the response rate was low (1,202 responses out of 7 million invitations). It's likely that those who took the time to fill out the survey were also the ones having the most trouble finding financial aid.

But we do know that private student loans, because of the tightening of credit markets, are more difficult to get. While the actual percentages of students being denied private loans may not be as high as FastWeb reports, it's still higher than in previous years, when easy access to credit helped fuel a boom in private lending.

So what are policymakers to do?

Tuition levels have risen to the point at which federal lending limits are insufficient to cover tuition at pretty much all private colleges and even some public, 4-year institutions. As a result, some congressional members are talking about raising federal loan limits again to make up for some of the lost private loan dollars. But that would be a mistake.

Tuition levels were able to get as high as they are partly because of easy debt--in an era of loose borrowing requirements, students were able to access large amounts of private loans. This was a great situation for colleges--students took out large amounts of loans, the institutions got paid, and students were left to bear the debt burdens. While lip service was paid to the need to reduce tuition prices, there wasn't much real pressure - enrollments stayed high and tuition bills were paid. Now that private lending is more limited, there may be some real price pressure on colleges to reduce tuition rates, or at least limit increases.

Adding to the argument against raising federal loan limits is a recent admission by the University of Phoenix that it sets tuition partly based on federal loan limits. And it actually cut tuition in its two-year Axia college division after seeing that students were dropping out because they maxed out their loan eligibility. So maybe less borrowing and more pressure to lower prices isn't such a bad thing in higher education, and could lead to more reasonable tuition rates.

Even when the credit markets loosen up, we (hopefully) won't return to the wild west days of lending that led to our current problems. Just like subprime mortgates aren't really good for home ownership, subprime student lending isn't really good for college access or success. Tighter private loan markets might result in a more cost-consciousness, on the part of students and parents, and institutions.