Opportunities for equitable access to college are harder to come by than ever, with the shift in federal aid policy moving from grants to loans, the passing of the College Cost Reduction and Access Act of 2007 (CCRAA) and the collapse of the consumer credit markets.
These three factors are certain to affect anyone seeking financial aid for college tuition and create a perfect storm for the already troubled loan industry, which is towing millions of borrowers now dependent on loans to finance their college education. Yet, it will be students from middleand low-income homes - largely Blacks and Hispanics - who will be hurt the most, lacking the resources to adjust to the increased financial burden they will be forced to carry.
In the 70s and '80s, with the federal government committed to increasing educational opportunities, most federal aid policies were designed to increase access to college for students who couldn't afford a college education. Since that time, however, the federal government has decreased its investment in grants and favored loans instead.
The most recent College Board data bear proof: From 1996-97 to 2006-07, total federal grants for undergraduate students adjusted for inflation grew by 83 percent ($9 billion to $16.5 billion); total federal loans grew by 51 percent ($25.8 billion to $39.1 billion); and state and private loans grew by a staggering 854 percent ($1.6 billion to $15.7 billion). In short, the federal government distributed $97 billion in aid to undergraduates from all sources except from the state and the private sector. At the same time, students borrowed almost $16 billion from state and private sources to bridge the shortfalls to finance their college education.
The CCRAA, effective October 2007, had a large effect on lenders, and slashed approximately $19 billion in subsidies, while lowering its guarantee from 99 percent to 95 percent. Because the subsidies and the federal guarantee have decreased and loan defaults have increased, lower profit margins for lenders have resulted.
Adding to the mix, the collapse of the housing market in 2006 and 2007 hurt the entire credit market Student loan pools traditionally auctioned on the secondary market to allow lenders to raise capital in order to continue making loans have, in effect, dried up. Investors, skittish about the housing market collapse, grew concerned with the potential losses from student loan defaults and lost their appetite to invest in student loan pools.
The combined effect from the CCRAA and the consumer credit crunch means less profit for lenders, higher losses from loan defaults and lack of capital for future loans.
What's next? Smaller lenders will exit the marketplace because of their inability to profit, raise capital and sell loans. …