HERALD EDITORIAL: WMU’s loan offerings are the best option for students overall

As we watch the financial markets uncoil around the world we can stop and take a moment of appreciation for the system we have at Western Michigan University.

Most of the financial industry had adopted strategies of accepting high risk and high profit lending practices.  Until the system failed they actually cleaned-up very well; unfortunately, the system did fail and now most institutions are up a creek without a paddle.  Our university took a different approach.

Mark Delorey, director of student financial aid at WMU provided some insight into the myth of the student loan crises.

The first thing to note about our system is that it has been built to protect the students at WMU.  It protects both our ability to secure loans as well as keeping the terms of those loans favorable.  The financial aid office is focused on what it should be, keeping us in school for as long as we need while maintaining low borrowing costs.

Largely, they have accomplished this by ignoring the malfeasance of the rest of the market.  The most noteworthy aspect of the loan structure at WMU is that approximately 90 percent of all our loan funding is secured from the federal government.

Delorey indicated that unless the federal government goes bankrupt we are good.  If the federal government does goes bankrupt, very unlikly, we will not be concerned with student loans. The benefits from the system at WMU are derived through the university’s participarion in the direct loan program.

The other 10 percent of funding is coming from private lending institutions.  Delorey and his staff have actually protected us from them pretty well.

The financial aid office sent requests for proposals, RFD, to a number of student loan providers.  This means a whole lot of lending institutions submitted their terms to WMU and WMU, in-turn, leveraged the best terms using its loan volume.  This is the same way Walmart keeps its prices low.

Delorey said the selections were based on cost and terms.  The school keeps interest rates as low as possible while providing flexibility in payment schedules.  The loans promoted through the university are ammenable to both forbearance and deferrment options; good to have as none of us are really sure what the future will hold.  The three recommended private loan providers are Sallie Mae (SLM), Nelnet (NNI) and Citi (C).  Today, these institutions are all solvent; an oddity in their sector currently.

The direct loan program  allows students to receive governemnt secured loans directly from lenders.  This is the most beneficial structure for students because they do not have to worry about what happens if the providers go bankrupt.

The other common institutional relationship is the Federal Family Education Loan Program, FFELP.  In this program loans are provided through private banks and then are secured by the federal government.  This set-up has an extra step for governemnt securitization.  Delorey indicated that many institutions are now moving to the Direct Loan program due to disruptions in the FFELP program.

There is another option if students do not want to work with the school and their financial aid programs. Many private lenders will provide education loans to the families directly.  Companies such as MyRichUncle (UNCL) do this.  These lenders have, according to Reuters, built their business model on high-risk strategies.

In the beginning, 2001, MyRichUncle accepted future student earnings in place of interest; reminiscant of indentured servitude.  Sameer Gokhale of Keefe Bruyette & Woods described their business model as, “these guys seem to pursue a kind of high-risk, high-reward strategy.”  This is what is known as asymmetric risk or fat-tails; it can go very well or very poorly.  For MyRichUncle it has been mostly bad lately.  They are trading at junk status and their ability to provide future loans is in question.

The take-away is this: WMU is looking out for its students.  For those who need to borrow money for educational purposes, go see the financial aid office in the Faunce Student Servies building. Listening to people who know what they are doing is easier than figuring out terms on ones own.  The ability to get student loans should remain viable for a very long time.

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Posted by HeraldAdmin on Sep 30 2008. Filed under Editorial, Opinion. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry

Cody Kimball
Web Manager: I'm a Communication Student at WMU, a SCUBA Diver, Boater, Ordained Minister, Notary Public, Web Designer, Film Maker, DJ, and of course a Journalist. Born and raised in Port Huron, MI and a graduate of SC4. http://www.codykimball.com