What Financial Aid Administrators Need to Know About the Financial Crisis
What Financial Aid Administrators Need to Know About the Financial Crisis
In a departure from my regular writing for students, parents, and families, this post is specifically for financial aid administrators and professionals, about what you need to know about the market issues and more important, ways you might be able to explain all of this to students and families who are angry, confused, and upset.
Why This Is Happening
At the heart of all of this is the fact that over the past 5 years or so, financial institutions of all kinds got involved in lending that was far too risky:
- Mortgages that borrowers could never have afforded
- Loans to people with no ability to repay
Imagine for a moment that you had $100. You want to make some money in lending, so you lend it. Great, but now you’re out the $100. So you sell 5 IOU notes to friends for $21 each, and as the borrower pays you back, you pay down those IOUs.
As long as the borrower pays, everyone’s happy. You’ve made money, your investor friends are making money, and the borrower is happy.
Some of your investor friends may even borrow money to buy more IOU notes from you.
Some of THEIR friends are borrowing money to buy more IOU notes from them.
At the peak of market craziness, some investment banks were borrowing at 31x leverage. That means they owed someone who owed someone who owed someone who… 31 times.
As long as the borrower pays, everyone’s happy, all 31 people in the chain.
As soon as the borrow can’t pay, though, trouble strikes. You still owe the people who you sold IOU notes to, but no money is coming in from the borrower, so now you have to pay out of pocket on those loans. And if you have trouble paying, then your investor friends start running into trouble on their IOU notes.
All this would have been fine if mortgages were given to only solid, credit-worth individuals well within their ability to repay. That, however, was not the case. Mortgages and other loans were given to people who clearly had no ability to repay them, and the house of cards has been coming apart ever since.
How This Impacts Families
The “credit crunch”, or whatever term you’d like to apply, is in short not getting better. It’s getting worse, because more and more banks are having to use up cash they’d normally lend with to pay off their IOUs. That means less cash is available to lend with, which in turn means fewer student loans, especially private student loans. If any significant percentage of your institution’s students rely on private student loans to cover the remaining cost of education less federal and institutional aid, they will continue to have trouble getting funds to pay for college.
The broader economic decline means that you’ll see more people in your offices asking for help, more people putting demands on your budgets. How much more? It’s difficult to say, but initial reports from some institutions during the fall show 30% - 40% increases in requests for aid, with some families having no wage earner at all.
More student lending companies are likely to go out of business. Simply put, if the securitization markets (sales of IOUs) remain locked up or decline even more, student loan companies will be unable to sell their IOUs and will run out of cash, as some did this fall. While the Department was able to get financing arranged for some, others ran out of time before they could get access to funding.
As the economy declines, you’ll also see state budgets run into serious trouble, as they already are in New York, California, Florida, Arizona, and beyond. While higher education has weathered budget cuts in the past, the magnitude of this economic downturn may mean far greater cuts than we’ve seen in recent times.
When Will Things Get Better?
Again, so difficult to say. Everything hinges, ultimately, on when foreclosures and defaults in real estate, both residential and commercial, come to an end. Given how much money was loaned out under dubious terms over the past 5 years, some charts and data point to the end of 2011. Will it take that long? No way to know, but clearly, there’s still quite a bit of wringing the junk out of the market to be done.
What Can You Do?
You’re already ahead of the curve by reading this article. Here are some concrete steps you can take to minimize the impact of the continued economic problems for your students and their families.
First, make sure you’re okay. If you have any amount of cash (loan disbursements, grant funds, etc.) sitting in a bank account that exceeds the FDIC insurance limits ($100,000 per customer account), ask your comptroller, CFO, or business department to resolve that immediately, to protect the funds you do have on hand. This, by the way, extends to university payrolls - when IndyMac bank failed, a number of payrolls above the insurance amount were redeemed at 50%, meaning that payroll cash above the FDIC limits got cut in half.
Second, make sure you’ve got more than a small handful of lenders to work with if you’re in the FFEL program. Diversification is the key - have multiple partners so that you can switch quickly if market conditions warrant. If you are working with lenders who are publicly traded on the stock market, you may want to use a free service like Google Finance to occasionally see how they’re doing, financially. If you can operate as both a FFEL and Direct Lending school, it’s worthwhile at least securing approval from the Department to offer Direct Loans, just in case. At the NASFAA national conference, some financial aid administrators were indicating that approvals took as little as 3 days.
Third, you may want to consider the bold and audacious idea of “raising capital” - raising money - for financial aid directly with your development and alumni offices. It may be very worthwhile to reach out to donors and ask them to help build up a fund specifically for financial aid that can help your office weather cutbacks in institutional and state aid. With clever marketing and a willingness to be bold, you could potentially put your office in a much better position to help families, and be proactive rather than reactive.
Conclusion
These are unprecedented times, which require unprecedented thinking and action. As with every crisis, there exists the opportunity for you and your financial aid office to grow stronger relationships on campus not only with students but with other departments, helping to make people aware of just how vital financial aid is to a well-functioning institution. Use the financial crisis to heighten awareness of programs like College Goal Sunday, your office’s functions and staff ready to help, scholarship opportunities that traditionally get overlooked, and how you can be a greater part of your institution’s solution to the financial crisis.
When markets recover, and they will over time, though it may be a while, your office can be remembered as one of the shining points in a grim time.
Christopher Penn is the Chief Technology Officer of the Student Loan Network, a Boston-based FFEL provider, and producer of the Financial Aid Podcast.
Doing my fiduciary duty: Yes, the Student Loan Network is still in business. Yes, we’re still able to offer loans. We’re happy to work with you if you want to work with us.
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