The student loan option remains a useful adjunct to federal grants, work/study programs, and cooperative education programs, Mr. Cronin points out. But excesses of enthusiasm for student loans in the 1980s created problems, from which he derives at least seven basic lessons.
WHAT CAN the higher education community learn from the financial troubles experienced by the Higher Education Assistance Foundation (HEAF) in the summer of 1990? During the 1980s the HEAF group was the largest and most aggressive of the not-for-profit student loan guaranty agencies. HEAF provided loan guarantees first for Minnesota and later for many other states whose legislatures were not inclined to create their own agencies to guarantee student loans, including Wyoming, Nebraska, Kansas, and West Virginia -- as well as the District of Columbia.
HEAF also reached out to any group that wanted guaranteed access to student loans, including the United Negro Colleges, the League of United Latin American Citizens, the Lutheran Brotherhood, a variety of law schools, and even the trade, technical, barber, and beauty schools that grew substantially in number during the 1980s. The size of HEAF's portfolio of guarantees grew until it reached 10%, then 15%, and finally more than 30% of what by 1987-88 had become a $10-billion-a-year federal student loan program.
What went wrong for HEAF? The federal government "reinsures" student loan guarantors according to the level of annual default rates on the loans they guarantee. Full federal reimbursement is paid only if a guarantor's default rate is under 5%. Only 90% is reimbursed for default rates in the 5% to 9% range, and only 80% for default rates higher than 9%. HEAF experienced several years of double-digit default rates. Several large national lenders specializing in making loans to students in career schools pursued the speedy HEAF guarantee service. Incredibly, one degree-granting college in Kansas, whose loans HEAF guaranteed, purchased a "correspondence" tractor-trailer driving school, in part to help balance the college budget. HEAF was also one of the three agencies that guaranteed loans for several California-based chains of career schools with high default rates whose loans were serviced by United Education Services (UES), an enterprise run by the trade school owners themselves.
Hearings conducted by Sen. Sam Nunn (D-Ga.), who chairs a U.S. Senate subcommittee on investigations, revealed a lack of diligent oversight of the loans guaranteed by HEAF and, ultimately, by the federal government. Fortunately, these 1990 hearings came in time to shape the debate on the 1991 or 1992 reauthorization of student aid and higher education programs. In November 1990, when Sallie Mae (Student Loan Marketing Association) assumed $9 billion of HEAF's responsibilities, a strong signal was sent to the Congress, to the Bush Administration, and to the higher education community that the time had come to make some crucial revisions in the programs that guarantee student loans.
Why couldn't HEAF correct the situation on its own? Testimony by HEAF's chairman before the Senate subcommittee indicated that he was not allowed to cut off lenders or schools with high default rates without following a cumbersome review process that might have been slowed still further by litigation in each case. Guarantors, as first-line insurers and as administrative agents, previously had more discretion in their business dealings. However, increasingly figid federal regulations and interpretations of federal policy had limited this discretion and so required HEAF to continue to guarantee risky loans.
Subsequently, Congress authorized the U.S. Department of Education and state guarantors to take emergency action to suspend those institutions that were not abiding by regulations governing federal loans. Furthermore, in the wake of savings-and-loan disasters and in the shadow of a growing federal deficit, no representative or senator wanted to extend the bailout option to student loan agencies. …