Credit Crunch Hits State Education Loans; Michigan Suspends Program

Last week, the state of Michigan suspended its MI-LOAN student loan program citing “current and unprecedented capital markets disruption” which has dried up funding sources. The temporary suspension doesn’t affect any MI-LOANs for which school certifications have already been received. More than 100 Michigan colleges and universities participate in the program. Last year, about 8,500 loans were given through the MI-LOAN program for a total of $68 million.

The MI-LOAN program, offered through the Michigan Higher Education Student Loan Authority (MHESLA), offered students attending Michigan degree-granting colleges and universities, provided fixed and variable loan programs awarding eligible students aid between $500 and the full cost of college minus any other financial aid.

Last week the Montana Higher Education Assistance Corporation was unable to sell $300 million in student-loan bonds, meaning less available money for education loans in that state. However, officials said in published reports that they don’t expect the failure of the bond issue to affect funding this year.

Typically when a bond issue fails, the seller will return the bonds to market with a higher interest rate, meaning a higher interest rate for borrowers if the reissue is successful.

The college aid situation looks better in Iowa, where Iowa Student Loan is joining with the state’s banks and credit unions to help ensure that state students have access to aid.

Effective for the 2008-2009 academic school year, Iowa banks and credit unions are agreeing to fund a significant amount of federally guaranteed student loans from their available resources and hold them in their respective portfolios. Iowa Student Loan will continue to provide administrative expertise and servicing,

“Based on the cutbacks already announced by major national student loan providers, we know that that there may be a shortage of student loans this fall if financial markets do not turn around,” said Steve McCullough, president and CEO of Iowa Student Loan, in a prepared statement. “We have asked our lender partners to join with us as we attempt to mitigate the impact of this potential shortage in Iowa.”

On the federal level, the U.S. House of Representatives recently approved the College Opportunity and Affordability Act (H.R. 4137), designed to ensure that the nation’s higher education programs “operate in the best interests of students and families.”

An October 2007 report from the College Board showed that, over the previous five years, tuition and fees had increased across the board, at public and private colleges and at two-year and four-year colleges. The bill encourages colleges to rein in price increases, attempts to ensure that states maintain their commitments to higher education funding, even though some state programs are feeling the pinch of the credit crunch, and providing students and families with consumer friendly information on college pricing and the factors driving tuition increases.

The bill’s sponsor is California Democrat Rep. George Miller, chairman of the House Education and Labor Committee. Miller spokesperson Tom Kiley said that the legislation should reign in price increases by creating a college price index and require any college exceeding the index to justify the increase to the U.S. Department of Education. The DOE would also list tuition increases at all colleges for comparative purposes and greater transparency. Miller’s office had no projections for how much, if at all, this new detail will slow the annual increase in the cost of higher education.

The legislation also seeks to streamline the federal student financial aid application process; help students plan for textbook expenses in advance of each semester; allow students to receive year-round Pell Grant scholarships; and increase college aid and support programs for veterans and military families

The Senate passed a similar bill last year, but there are rumblings that President Bush may not sign the legislation because he’s opposed to provisions that would end the Department of Education’s authority for reviewing the performance of college accreditors.