Education officials reassure students

Say federal loans remain available

Senator Edward M. Kennedy held a Senate field hearing yesterday at Northeastern University on student loans. (David L. Ryan/Globe Staff)

Federal education officials and college administrators sought to reassure students and families yesterday that the current turmoil in the financial markets will not threaten the availability of government student loans, but cautioned that increasingly popular private education loans could become scarcer and more expensive.

Speaking at a public hearing at Northeastern University, Sara Martinez Tucker, US undersecretary of Education, said that disruptions in the private lending market have not affected federal loan programs and that safeguards are in place to ensure that student loans remain available if economic conditions worsen.

Colleges and universities nationwide have "indicated no difficulty in lining up student loans," she said.

"For the coming school year, federal aid will be available," she said. "Rest assured, the federal government will not allow any interruption of the loan program."

Many private and nonprofit lenders have announced in recent weeks that they will no longer provide student loans and are tightening eligibility because of a growing credit shortage, causing concern among students and parents who rely on government-backed loans such as Stafford and PLUS to pay for college.

About 75 percent of student loans involve federally backed loans, and 25 percent are private.

Eileen O'Leary, director of student aid and finance at Stonehill College, said she was confident the federal government could absorb a "sudden and significant" increase in loan requests if the trend continues.

While some third-party lenders have stopped providing guaranteed student loans, there are still more than 2,000 participating in the program, and some have announced plans to enter the market more aggressively.

Senator Edward M. Kennedy, who chaired the field hearing, said he wants guarantees that credit market woes will not put student loans at risk. He urged Tucker to take preventive steps to strengthen the system, in case more commercial lenders leave the industry.

"We learned today that many of our nation's major financial institutions are nearing collapse," he said, referring to JPMorgan Chase & Co.'s government-backed buyout of the stricken investment bank Bear Stearns. "We must prevent this from happening to student loans."

Kennedy, chairman of the Senate Committee on Health, Education, Labor and Pensions, praised Northeastern's decision, announced yesterday, to forgo commercial lenders and provide loans exclusively from the federal government. Northeastern said growing uncertainty in the student loan industry prompted the move.

"The direct-loan program is more efficient, effective, and less costly to the American taxpayer," Kennedy said. "I think you'll find more and more schools going this way, and we need to be sure the system can handle the additional demand."

The direct-loan program constitutes about one-third of total student loan volume.

Northeastern became the second major university in the country to switch its loan program from third-party lenders to the federal government, and Kennedy pressed Tucker on whether the Department of Education was prepared for the potential rise in demand.

On Friday, House lawmakers urged Margaret Spellings, US secretary of education, to develop contingency plans for the federal student loan program to guarantee availability. Spellings, as Tucker did yesterday, said her department is monitoring the situation closely and surveying colleges to determine the scope of the problem.

Yet some financial aid specialists testified that the main problem is not that students cannot secure loans, but that they must borrow heavily from private sources to pay surging tuition costs.

"In some cases, the loans are so expensive, they are designed to fail," said Deanne Loonin, director of the student loan borrower assistance project at the National Consumer Law Center in Boston. Loonin said a tighter market for private student loans was a necessary market correction that will curb predatory lending practices.

"To the extent there is a crisis for students today, it is that heavy reliance on loans to finance education means that many students come out of college buried in debt," she said.

But Thomas Graf - executive director of the Massachusetts Educational Financing Authority, which primarily provides private loans and whose ability to secure financing for loans is in doubt - said the credit crunch is affecting students' ability to pay for college.

"Students will have fewer loan options, and at a higher cost," he said. "Access to capital markets has been difficult, if not impossible, for not-for-profit lenders."

Interest rates on Stafford loans are fixed at 6.8 percent, but the rates on new loans are legislated to drop to 3.4 percent by July 2011. Private loans are generally more expensive, with rates as high as 19 percent, Loonin said.

Kennedy pointed out that federal aid, in both grants and loans, has lagged behind tuition increases, and he is calling for increased loan limits and eligibility.