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School daze

8/8/2008

The Deal

Three years ago, an obscure Chicago-based home mortgage lender called Capital Assurance Group decided to tap the student loan market. It hired veterans in educational lending, changed its name to FinanSure LLC and unveiled various products designed to grab a chunk of the $100 billion market in loans for post-secondary education.

By early 2007, FinanSure had exited home mortgages completely (its Illinois residential mortgage license was revoked that August). In February 2007, FinanSure syndicated its first student loan master trust, $925 million backed by government-guaranteed educational consolidation loans. It also attracted a $30 million investment from British private equity firm Cambridge Place Investment Management LLP. FinanSure Student Loans’ name began appearing on both recommended lending lists of colleges and consumer lists, decrying its aggressive boiler-room telemarketing practices.

In the fiscal year ended Sept. 30, FinanSure held almost $800 million in government-guaranteed student loans, according to the independent educational lending Web site FinAid.org. FinAid.org listed FinanSure in the top 20 of student loan consolidators for that fiscal year.

Less than a year later, it’s as though FinanSure never existed. Its staff is gone, its loan portfolio sold. The Cambridge Place executive who had publicly talked up the FinanSure investment suddenly left his firm. (When asked whether the executive was fired for his role in FinanSure, a spokesman for the firm said he wouldn’t comment on personnel matters.) In recent months, the only trace of FinanSure’s CEO, Evan Silverman, can be found on John McCain campaign contribution rolls. Silverman is listed as the managing director of something called Sunnyside Capital Partners, which operates from his Highland Park, Ill., home with an unlisted telephone number.

That about sums up how it’s gone in the student loan industry. Primed by congressional fiat and government subsidies, propelled by fast-rising tuition costs, student lending rode high through the first half of 2007. Unknown lenders such as FinanSure mushroomed. Established players such as SLM Corp., commonly known as Sallie Mae, accumulated huge war chests and gobbled up competitors. One private student loan provider, Nelnet Inc., came out of nowhere, acquired 13 companies in a five-year period ending 2006 and emerged with more than $26 billion in assets. Major consumer-lending institutions such as CIT Group Inc. paid generously for companies that would give them a piece of the action. Student loans became a large and integral part of the market in asset-backed securities.

For the past several months, however, the industry has lurched from one crisis to another. It’s been blasted for making subprime loans, buffeted by corruption-related scandals and clipped by angry legislators. The collapse in securitization and auction-rate securities brought critical parts of the student lending process to a screeching halt. A few educational-lending concerns have gone bankrupt. Others are teetering. Some of the biggest names in student finance have walked away from the industry. Others say they will reduce lending to schools with higher default rates, affecting the neediest, lowest-income students. Investor and consumer lawsuits abound.

Student lending suffers from many of the problems that beset the mortgage industry and, if anything, may be even more complex, though it’s received less publicity and even less understanding by the public. “Federal intervention is essentially the same [as mortgages],” says Barmak Nassirian, the associate executive director of the American Association of Collegiate Registrars and Admissions Officers. “The secretary of education is a cut-rate ATM for every bank.”

In fact, the entire industry came close to buckling earlier this summer before Congress and then the Department of Education intervened with temporary fixes. Most significantly, the Education Department announced in late May that, until Sept. 30, 2009, it will buy educational loans from originators at cost plus a small fee, ensuring a secondary market. The department is also offering to act as a lender of last resort to guaranty agencies, and said it was doubling the money available for direct educational loans, anticipating a spike in that program.

Since then a few private and state lenders, which had announced a moratorium on new federally guaranteed loans, have crept back. Hundreds of colleges and universities have shifted funding sources from private lenders to the government.

However, these remedies are at best provisional. The Department of Education’s bailout lasts for a year. And its implementation rules leave many in the industry unenthusiastic. “Less than satisfactory,” says Richard George, president and chief executive of Great Lakes Educational Loan Services Inc., the nonprofit agency that acts as guarantor for education loans in Wisconsin, Minnesota, Ohio, Puerto Rico and the Virgin Islands. George, whose agency has suspended its federal default fee waiver, says delinquencies and defaults will “significantly increase” under the new rules. Lenders need to advance money before the government reimburses them. The availability and cost of bridge loans necessary to originate loan packages “may prove difficult for many,” he says.

“This is a one-year Band-Aid, not the best Band-Aid, but it will keep it together for next year,” adds FinAid.org founder Mark Kantrowitz.

“This ensures students will get loans and there won’t be too much chaos, but it’s not a long-term solution.”

This is normally the time of year students and their parents scramble to pay tuition and fees. Many families confront what seems a financial black hole. To bridge it, they must maneuver through complex loan programs. The direct lending program offers lower-cost loans both backed and administered by the U.S. government. The Federal Family Education Loan Program, or FFELP, is privately issued but backed by government guarantees. Other loans are completely private and have no government backing. “What we have is breathtaking in its needless complexity,” says Nassirian, an outspoken critic of the student lending industry. “It didn’t happen by accident.”

A college or university may select one approach or the other and, many times, favor one lender over others. Until they came under investigation by New York State Attorney General Andrew Cuomo and other states’ law enforcers, some colleges and universities not only pushed for certain private lenders but acted as co-lenders with them. Educational institutions “became intermediaries,” says Nassirian. “It was systemic co-option. Institutions were asking lenders, ‘What can you do for me if I hand over the borrowers to you?’ ”

The stakes are high, the amounts staggering. Last academic year, FFELP loans totaled $54.7 billion, while direct loans amounted to $13.6 billion. Commercial lenders peddled more than $20 billion in private loans. Loans consolidating previous borrowings amounted to $40 billion more.

Student lending is a classic story of financial excess, with a few critical twists. Markets were from the beginning massaged and manipulated. Congressional largess primed student lenders with government subsidies and guarantees. Specially crafted legislation dictated everything from interest rates to marketing competition. Like the mortgage industry, education-related lenders got fat this decade on cheap money and the seemingly insatiable appetite of investors for securitized assets. Most student loans had the added incentive of government guarantees. There were both yield guarantees and credit guarantees. “Because the loan is guaranteed, it was very easy for investors to understand,” says Richard Fried, a New York partner with Stroock & Stroock & Lavan LLP. Fried specializes in structured finance.

When both securitization and securities auctions collapsed, lenders were stuck. State agencies issuing bonds were stuck. And investors holding the instruments were stuck. When these tools of modern finance get unstuck is anyone’s guess. “The auction-rate market is dead,” declares Philip Aidikoff, a Beverly Hills, Calif., lawyer, who represents investors.

Nonetheless, demand for loans remains strong. This isn’t the same as the housing crisis, where home sales and easy mortgages are tightly interwoven. In ever-greater numbers, students are enrolling in college. Tuitions continue to rise. Students and parents still need to figure out how to pay for this steadily mounting educational adventure.

The dislocation of the past several months in the student loan industry may prompt a major increase in the level of direct government lending. But because so many private lenders have dropped out, the crisis could also end up consolidating lending in fewer hands. Most notably, Sallie Mae remains weakened. But it could emerge more dominant, even if far less profitable. “They’ll probably have an increased market share, but of a much less valuable market,” Kantrowitz says.

The industry landscape has already changed dramatically. In early 2005, for example, CIT paid $318 million for Education Lending Group. After CIT gained control, its management more than doubled the student loan portfolio in the renamed Student Loan Xpress Inc., largely through aggressive marketing of consolidation loans. By the end of March, its student loan portfolio totaled $12.6 billion. But the company since the fall had been hammered by everything from government fines to the collapse in asset-backed securities. In April, as the market began to shut down, CIT announced it would stop originating student loans, effectively shuttering the unit. CIT has already taken more than $300 million in impairment charges.

A CIT spokesman says the company wouldn’t make available anyone to speak about its experience.

Student Loan Xpress wasn’t the only one to give up. Comerica Bank, HSBC Bank, TCF Bank, M&T Bank and a host of smaller banks have exited the market. So did nonbank lenders including the once-aggressive Goal Financial LLC. Bank of America NA, one of the biggest industry players, no longer offers private loans. Sovereign Bank offers only private loans. Kantrowitz estimates that 120 lenders have either suspended or exited student lending.

For others in the industry, the consequences have been graver. One private loan guarantor, The Educational Resources Institute, or Teri, declared Chapter 11 in April after witnessing a spike in defaults and anticipating many more.

Teri guaranteed loans from First Marblehead Corp., which in turn provided claims management, marketing and origination services on behalf of the actual lenders, including Bank of America and J.P. Morgan Chase Bank NA. Not only will First Marblehead have difficulty collecting almost $20 million Teri owed before filing, but its various service agreements with Teri were terminated in bankruptcy court, potentially depriving it of more than $100 million a year in revenue. This is a stunning reversal. As one of the country’s largest service providers of private student loans — including securitization — the company’s earnings “stair-stepped to heaven in recent years,” Barron’s gushed in April 2007.

Little more than a year later, First Marblehead lost $229 million for the quarter ended March 30, 2008. It can’t securitize. Big clients such as BofA have pulled out of private student loans. Goldman Sachs Capital Partners has delayed an agreed-upon equity investment. The company has cut its workforce by more than half. And its share price is down more than 90%.

There has always been a problem with student lending: the borrowers. Student lending has been woven tightly into the fabric of for-profit educational and vocational establishments. Lenders largely catered to less affluent students and flourished on the backs of both government-guaranteed and private loans, even though borrowers were often high risk. “On the face of it, it looked odd,” Nassirian says. “Historically, we know the lifetime default rates approach 50% for vocational, for-profit [schools].” But because lenders could so easily offload loans, they could play fast and loose with creditworthiness. “The lender didn’t assume the risks.”

Sallie Mae played a major role in this sector. “We were seeing Sallie Mae issue a pretty high rate of loans to those with either little credit or poor credit histories,” says Robert Shireman, executive director of the Project on Student Debt.

This year, the contradictions surfaced and lenders turned off the taps. The for-profit chain Corinthian Colleges Inc. reported that early this year Sallie Mae notified it that it would stop issuing subprime loans. Last year 75% of Corinthian’s private loans were rated subprime; Sallie Mae issued almost all of them.

The ease students had in obtaining private loans for all kind of vocational programs created an environment ripe for abuse. For example, a rapidly expanding chain of flight schools called Silver State Helicopters LLC filed for Chapter 7 bankruptcy in February in Nevada. The decision to liquidate came after Citigroup Inc. ended its loan program to the school’s students.

New York private equity firm Eos Partners LLP acquired a 60% interest in Silver State last year for $30 million. That investment is now worthless.

Silver State required students to produce almost $70,000 in fees up front. Students, who typically borrowed heavily to attend, discovered to their dismay that lenders — notably KeyBank NA of Cleveland — still demanded repayment even though there was no longer a school to attend. What’s more, a provision slipped into the 2005 bankruptcy act made private student loans impossible to discharge, even in bankruptcy. This extraordinary fillip to the industry gave private student lenders rights no other unsecured creditor has.

“It’s just an abomination,” says Andrew August, a partner with the San Francisco-based Pinnacle Law Group, which has filed a class action on behalf of former Silver State students against KeyBank NA, Student Loan Xpress and other lenders. August alleges fraud and unfair trade practices. The lawsuit calls the school “a Ponzi scheme that enabled its owner and CEO and his partners to siphon off millions of dollars for their own personal use.” The school lacked adequate equipment, instructors and maintenance necessary for students to gain pilot ratings, the lawsuit alleges.

Laura Mimura, a spokeswoman for KeyBank, says the bank “won’t comment on any legal proceedings as a matter of policy.” She says the bank “has worked with and will continue to work with individual student borrowers on repayment and has considered them on a case-by-case basis,” but would not go into further detail. She says that although the bank still participates in federal guaranteed student loan programs, it exited lending to for-profit schools in 2005.

The no-discharge provision illustrates the power the industry has wielded. Stalwarts such as Sallie Mae have underwritten political campaigns and poured millions into lobbying efforts, not unlike the lobbying of other government-sponsored enterprises such as Fannie Mae and Freddie Mac.

Today’s gargantuan student-loan apparatus traces to 1965, when the federal government began guaranteeing and offering interest rate subsidies on student loans issued by banks and other private lenders. To ensure a working secondary market, Congress in 1972 created Sallie Mae, then known as Student Loan Marketing Association. This so-called GSE acted as a buyer of last resort of student loans; for years, it was the only secondary market.

The system evolved rapidly in the 1990s. Private lenders gained government subsidies, notably an insured yield. In 1993, the Clinton administration initiated a direct-lending program designed to bypass private lenders and cap subsidies. Mid-decade, however, the White House and a newly Republican-controlled Congress butted heads over direct lending, which had been designed to handle 60% of student loans by 1999.

What emerged was a compromise that created an odd kind of competition: The Department of Education offered subsidized loans, with interest rates set by Congress. Private companies could also offer these loans. The Education Department not only guaranteed the loans, but gave private providers subsidies to administer and service them. The government also agreed not to market its own loan program and was bound by law to charge an interest rate banks could discount and levy certain fees private lenders could waive. “The banking industry did a fabulous deal for themselves … not putting any money at risk,” says Michael McPherson, the president of the Spencer Foundation, which funds education-oriented research.

Individual colleges and universities could decide whether to use the direct lending program or FFELP. Several hundred chose direct lending. “We were overwhelmingly surprised at how wonderful it was,” says Roberta Johnson, director of the office of student financial aid at Iowa State University and the chair of the National Direct Student Loan Coalition. Iowa State was an early convert to direct loans.

As of last year, about 1,100 colleges and universities had signed up for the direct-lending program. That’s still less than one-third of all institutions. The government proved no match for private lenders, which gained the lion’s share of government-guaranteed loans through aggressive marketing, an anti-bureaucracy backlash and inducements to financial aid offices.

Many of those in the industry maintain this kind of dual system has kept prices down. “It’s good that we have both direct and federally guaranteed loans,” says Sandra Baum, an economist at Skidmore College, an authority on the economics of higher education and an adviser to the College Board. “It’s a more efficient system.”

However, taxpayers have borne the brunt at what one critic called “corporate socialism.” According to a 2005 Government Accountability Office study, direct loans cost the government $2.5 billion in subsidies. FFELP loans cost $36.6 billion. Put another way, FFELP required a 9.2% subsidy, while direct loans needed only 1.7%.

In some years, direct lending actually resulted in a surplus to the Treasury, as loan repayments and interest payments outweighed the costs of the loans themselves.

The intricacies of federal loan programs aren’t the only factors in this equation. Runaway tuition plays a major role as well. The cost of tuition has skyrocketed over the past 15 years, fueled in part by the amount of money available to students. But the amount of government-sponsored, low-cost loans to students has remained roughly the same since 1993. That mismatch created a huge, and increasing, demand for supplemental loans. Consumer lenders jumped at the opportunity, enticing students and parents with tens of thousands of dollars. Last year, private loans eclipsed $20 billion, a 25% gain. Private lending has jumped more than 10-fold since 1996.

Fifteen years ago, private loans were “negligible,” says Baum. “Now they’re 20% of the total. That’s a problem.”

It’s certainly been an acute problem for the less affluent. According to an Institute for Higher Education Policy study, students from families making less than $40,000 a year accounted for 27% of the private lending market in 2004. If anything, that percentage rose in the three years following the study.

The era of low-cost funds primed the flow of private, nonguaranteed student loans. Banks and nonbank financial institutions alike added these products to their consumer-lending arsenals. These nonguaranteed student loans were marketed heavily on everything from television commercials to telemarketers to Internet pop-up ads. The ads promised loans of tens of thousands of dollars with little more than a signature or two. One study indicated that at least one in 10 borrowers availed themselves of higher-cost loans even before they maxed out on subsidized loans.

Another facet was consolidation loans, which became one of the biggest money earners for private lenders. Until July 2006, government-guaranteed student loans carried variable interest rates. As rates fell, borrowers were eager to consolidate their loans — it was like refinancing — and private lenders obliged, since they could exploit government subsidies. But under another strange provision of the Higher Education Act, a borrower could consolidate only once, so lenders were under pressure to be as aggressive as possible. By the fiscal year ended Sept. 30, 2006, that market expanded to almost $90 billion.

Lenders chased big money. Colleges and universities became a favored way of gaining access to that market. Meanwhile, higher education institutions faced unrelenting financial pressures, so it isn’t surprising school financial aid offices fell prey to various deals lenders offered. The scandals that broke last year involving favors and kickbacks to financial aid officers were only the most dramatic examples of the abuse.

Since most lenders offered both government-subsidized and private loans, students and their parents faced a confusing array of choices. Understandably, financial aid offices became the sources for guidance on those loans.

In turn, those schools that opted for private originators of government loans would almost inevitably compile a list of preferred lenders. Corruption seeped in.

Some of these lenders showered financial aid officers with favors ranging from dinners to free trips. Sallie Mae and Nelnet employees staffed call centers for college financial aid offices. In the most egregious example, New America Foundation’s Higher Ed Watch discovered college aid officials had picked up stock options in Education Lending Group as compensation for sitting on an advisory board. Last year, The Chronicle of Higher Education, using data from Student Marketmeasure Inc., reported more than 500 colleges had a single lender making all federally guaranteed loans. Roughly 900 more had one lender making at least 80% of the volume.

Private lenders used a variety of techniques to entice universities. Private student loans were branded with the university’s name but were actually made by lending institutions. A financial institution would extend a line of credit to a university, which would use the money to make loans. The university would then sell back the loans to the institution but keep the premium for itself.

Some financial institutions offered revenue-sharing agreements, in which schools got to keep a small percentage of the loans in return for recommending a lender. Other lenders gave colleges access to so-called opportunity loans, packages to students who wouldn’t otherwise qualify for subsidized loans, in return for giving the lender preference status.

Some lenders devised ways to link with other university entities. Alumni associations could get a cut on every consolidation loan referred. Nelnet, for example, had agreements with 120 different alumni associations. “The profiteering that was occurring was milking students,” Laird argues.

Congress finally banned revenue sharing and gifts as part of the student loan overhaul package passed late last month.

State government entities got involved as well. When the federal government set up the lending program, each state designated either a state agency or a nonprofit corporation to act as a secondary market. Banks would make loans, then sell the loans to these entities. The state agencies needed to maintain liquidity, however. So they would issue bonds. These AAA-rated instruments not only found favor among investors seeking a slightly higher yield, but became a source of income for the states. Pennsylvania educational scholarship programs last year received $61 million from the Pennsylvania Higher Education Assistance Agency, the state’s educational bond-issuing authority, which lent $500 million in student loans and purchased an additional $2.5 billion on the secondary market.

Securitization was an enabler of all these programs. Simply put, student loans were sold to a trust that issued bonds backed by the loans. The system made perfect sense. These are long-term instruments with short-term funding needs. The government guaranteed the loans 97 cents on the dollar and offered subsidies to boot. But holding the loans wasn’t really an option for originators. They needed ever more capital to make ever more loans. So, they’d bundle them and sell them off, packaging the instrument as almost as good as a Treasury bill with slightly higher interest rates. Or they’d sell them to state guarantors, which would, in turn, bundle the loans and issue bonds.

According to the Bond Market Association, by 2005, of the $800 billion worth of asset-backed securities offered, almost $63 billion were student loan-backed.

Auction-rate securities provided another mechanism to ensure liquidity. State agencies especially would refinance through these auctions, with interest rates resetting every seven 14, 28 or 35 days, obtaining, in effect, long-term funds at short-term rates. Institutions provided buying power. In the last year or so of this churn, however, broker-dealers began enticing retail investors as well, promising “cashlike equivalents.”

As the industry developed, major student-lending players identified various growth avenues that had in the past been the domain of niche operators. This included state and regional lenders, servicing groups and collection agencies. Aggressive mergers and acquisitions followed.

Most notable: Sallie Mae, by far the biggest player, with $124.1 billion in loans held as of Dec. 31, 2007, about 60% of which were consolidation loans. This odd beast — government sponsored, publicly traded — began to privatize in 1997, a process completed in late 2004. From 1999 to 2006, Sallie Mae made 12 major acquisitions. These included several regional lenders, a debt collection agency and UPromise, an affinity marketing and credit card company tied to a college savings plan. “We are engaged in every phase of the student loan life cycle,” the company boasts in its latest annual report.

For years, SLM minted money; it posted $1.16 billion in net income in 2006. Private equity salivated. In April 2007, a consortium that included JC Flowers & Co. LLC, Friedman Fleischer & Lowe LLC, J.P. Morgan Chase & Co. and Bank of America Corp. agreed to pay $25.3 billion to take Sallie Mae private.

Then the sky fell. Already weakened by scandal and punishment by politicians, student lenders found themselves hostages to the shift in the overall credit market. Here’s a recap of what’s happened:

Led by Cuomo, several state attorneys general investigated student-lending practices, threatened suits and extracted fines and behavior codes from lenderss and universities alike, ending the most egregious practices.

Last September, President Bush signed into law the College Cost Reduction and Access Act. This cut private-sector subsidies by about $21 billion over five years, shifting money to grants for low-income students and reductions in rates on subsidized loans. The law trimmed subsidies to private-sector lenders from 50 to 85 basis points, depending on the loan.

The well-heeled and normally politically powerful student loan industry was suddenly hobbled in its ability to counter the legislation, since congressional action followed consent decrees from a number of lenders over dubious lending practices. “Because of Cuomo, it was harder for the industry to fight back,” says the Project on Student Debt’s Shireman.

The law yanked subsidies on consolidation loans as well by 55 basis points. Even before congressional action, however, this market had been losing steam simply because variable rates disappeared. Since July 2006, borrowers of federally guaranteed student loans now pay a fixed rate. With the reduction in subsidies, consolidations “made were very close to underwater,” FinAid.org’s Kantrowitz says.

Lenders like to blame congressional action for their woes. The fact is, reductions in subsidies may have hurt the bottom line, but the liquidity crisis was the real killer.

In August 2007, auctions sputtered and gasped. Weaker players like FinanSure dashed for the exits. Others held their breath. Industry stalwarts hoped the dislocation would be short-lived. After all, most student loan notes were backed by government guarantees, and unlike mortgages, there was no rapidly weakening market to contend with. “For a while we thought student loans might be immune,” says Stroock & Stroock’s Fried. “But then a tidal wave of a liquidity crisis swept away everyone.”

The student loan securitized market seized up. This followed the downgrading in mid-January by credit agencies of monoline insurer Ambac Financial Group Inc., which suffered big losses insuring structured products backed by home mortgages as well as bonds backing student loans. With investors spooked that Ambac itself might lack the resources to step in and cover losses, any residual interest in securitized educational loan products disappeared.

The student loan securitization market had $86 billion outstanding at the start of 2008. Nothing much has moved since, penalizing issuers and investors. Nonbank lenders regularly borrowed to issue loans, but without securitization, they were stuck. Waco, Texas, nonprofit Brazos Higher Education Service Corp. acquires, originates and services student loans. Its spokesman says Brazos is sitting on $7 billion in loans and paying $11 million more a month in interest.

The collapse of auction-rate securities also hurt. A typical provision in these securities states that if an auction fails, the interest rate paid to the holder of the underlying security drops to zero. As auction failures dragged on, many players announced loan program suspensions or terminations. State agencies from Pennsylvania to Arkansas, Massachusetts to Michigan, said they could no longer offer new federally guaranteed loans, since they had no ability to either hold them, auction them or securitize them.

Major banks displayed little appetite, either. And those that did got pickier about which schools they would service. Citigroup subsidiary Student Loan Corp. said in mid-April that it was suspending loans at “certain schools where loans with lower balances and shorter interest-earning periods result in unsatisfactory financial returns.”

That was code for community colleges and for-profit schools.

Even the original lender of last resort is pulling back. “Sallie Mae has lent too much money to students who have gone to schools without very good graduation records,” CEO Albert Lord said in a conference call earlier this year.

That’s the least of the company’s problems. Last fall, its presumptive acquirers bailed, citing a dramatic change in the market. They offered Sallie Mae $21 billion. Lord refused and took Flowers and the others to court to collect a $900 million breakup fee. The lawsuit ended when Bank of America and J.P. Morgan Chase agreed with syndication partners to provide a $30 billion financing line.

Even that may not have been enough to keep the company humming. In April, Sallie Mae hinted that it, too, might have to stop processing new loans. Kantrowitz believes this wasn’t an idle threat. “Sallie Mae was one or two months away from running out of liquidity,” he says.

Some critics believe lenders played chicken with the government and won. They say the government could have taken over with its direct lending program. Already, about 350 colleges and universities have either switched entirely from FFELP to direct or added direct loans as a backstop. The Education Department doubled the capacity of direct lending to $30 billion.

Others argue the dislocation would have been monumental had FFELP suddenly ended. “There was a concern that you could turn off the switch and leave schools in the lurch,” says Tim Guenther, the CFO at the Pennsylvania Higher Education Assistance Agency.

Lawmakers didn’t want to take the chance. Congress passed the Ensuring Continued Access to Student Loans Act on May 1. In late May, Education and Treasury announced a bailout that included paying private lenders a fee for administering government-guaranteed loans and acting as the lender of last resort.

Unlike the melodrama that ensued after Treasury announced a backstop facility for Freddie Mac and Fannie Mae, this plan generated little attention and no popular upheaval. Maybe that’s because students and parents alike are already suffering from tuition shock. That said, no one really knows what next year will bring as the much-needed industry tries to reinvent itself on a new economic basis.


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