Officials report 'crisis' in student financial aid

Just days after Paredes' testimony, The University of Texas System board of regents approved tuition and fee increases at System universities that will range from 5-13 percent. Likewise, Texas A&M University System regents followed by announcing tuition increases of 4-14 percent among its nine System schools. Those kinds of increases, particularly in tuition rates since they were deregulated by the Texas Legislature, have resulted in increases in student loans, said the commissioner.

At the same legislative hearing, financial expert Lee Donner told lawmakers that the vast majority of the $77 billion per year in the Federal Family Education Loan Program (FFEL) and alternative or private loans has been financed in the national and international capital markets. Subsidy cuts to the delivery system and increased funding costs has "reduced what has been a steady flow of these finances into the capital market on an ongoing basis for many years...to a mere trickle," said Donner.

As a result, he noted, a growing number of lenders plan to either reduce or end their participation in college loans - including four of the top 25 by loan volume. He said that as the "finance drought" continues, he expects more such announcements from lenders.

George Torres with Texas Guaranteed Student Loan Corporation said the FFEL provides more than $3.2 billion in federal loans each year, including two-thirds of the direct financial aid in Texas. Torres said 67 percent of the direct aid for student loans comes through this program.

"We don't know how deep this problem is…and it's impacting the lending community in different ways," said Torres, "but from our perspective, it's impacting by far the largest source of financial aid in Texas." Torres said the median federal student loan debt in Texas is $14,125, up from a little over $6,000 in 1994. "It has more than doubled in 13 years and it's going up," he said.

Paredes noted that in Texas, "students are more reliant on loans now than ever before," and financial experts note that private loans do not offer much of an alternative as their interest rates are not capped, thus costing more. Additionally, they are likely to have stricter standards relative to the credit of a borrower.

Dr. Carol McDonald, president of the Independent Colleges and Universities of Texas (ICUT) told legislators that it should be understood that no one knows how severe the problem will be. "It could be anything from some dislocation and inconvenience to a real crisis."

McDonald said there is likely to be a cascading effect. She said proprietary schools are "already experiencing this credit crunch," and that students this spring are facing difficulties in finding lenders and securing loans. She said it appears that lenders are "being more selective about both the kinds of institutions and the kinds of students they will serve if they stay in the market." The ICUT president pointed out that lenders believe those students in two-year institutions are a greater risk for default or uneven payment. Because of the parameters these lenders are setting up, McDonald predicted that students in community colleges, those in less selective regional universities, historically black and Hispanic-serving institutions will be the next groups to "feel the crunch."

Echoing the need for increased financial aid was Dr. Rey Garcia, president and CEO of the Texas Association of Community Colleges. "We have a financial aid crisis," he said. "If your goal is to increase participation and the expectation is that those students are going to come to community colleges, the money essentially is not there for them."

Even University of Texas System Chancellor Mark Yudof said he is "very apprehensive" that there is not enough in the federal loan program to meet students' needs.