How Will Students Pay for College Next Year?

I am a concerned Columbia College alumnus. Bank of America’s recent announcement—that it will stop making private student loans—in conjunction with the disruptions in the asset-backed student loan market, could make private student loans hard to secure. This situation presents Columbia University an opportunity to play a decisive role now, to help as many students as possible go to school this fall.

Congress and the Department of Education are commendably focused on ensuring that students and their families have access to federally backed student loans this upcoming academic year. But, even with access to these federally backed student loans (hopefully) and other forms of student aid, a subset of students and their parents still need to take out private student loans to help cover all costs of higher education.

However, the $17 billion student loan market in 2007, as estimated by the College Board, is not functioning well. Reasons include:

· Investors’ current lack of confidence in rating agency ratings
· Investors’ lack of confidence in guarantees issued by Education Resources Institute Inc., or TERI, the largest insurer of private student loans which filed for bankruptcy court protection April 7, 2008
· Lenders, including Bank of America, exiting the market in part due to TERI’s bankruptcy filing

Unless Congress chooses to guarantee the amount of private student loans likely needed this upcoming academic year—perhaps by increasing the amount of federally backed student loans available to students and parents—Columbia University will confront several choices including either guaranteeing the performance of private student loans, purchasing such a guarantee from a very well-capitalized third party, or helping affected students find education alternatives they can afford.

A prompt, well-thought-through solution(s) could:

· Highlight Columbia University’s leadership in developing an innovative solution
· Cause other institutions of higher learning to emulate Columbia University
· Strengthen the relationship students and alumni have with the University

To get a better sense of the possible private student-loan funding shortfall, a first step could be to gauge University-recommended lenders’ respective ability to make private student loans to Columbia students and their parents this year assuming they have to hold those loans on their balance sheets rather than securitize them.

Second, if there is a shortfall, the University can evaluate the cost of a third-party guarantee compared to self-insuring. Columbia University may determine that providing a guarantee costs less than purchasing a guarantee from a third party, given its comprehensive knowledge of loan default and recovery rates of its student population. The cost of any guarantee, though, should be borne by those who borrow through slightly higher interest rates.

Third, Columbia University could gauge investors’ and lenders’ appetite for student loans with such a guarantee. The University could also approach alumni as potential investors in this pool of student loans. Alumni may be willing to purchase loans, given their affiliation and their desire to help current students.

If a rock-solid guarantee does not generate the supply of loans needed, or the University chooses not to use its balance sheet, the University could hopefully direct affected students to resources with relevant information about alternative programs. Affected students could enroll in schools they can afford and return to the University when finances permit.

The time to be most helpful to students and their parents is now.

The author is a member of the Columbia College class of 1991.