Responding to reports that some lenders have stopped offering federal loans at community and other colleges, two Democratic senators introduced legislation Tuesday to prohibit lenders from picking and choosing among institutions.
Under the proposal, lenders that participate in the federal loan program would have to extend credit to any eligible student, regardless of such things as income or the number of years of education, as long as the college is part of the program.
The government already guarantees the loans at nearly full value.
Sens. Patty Murray, D-Wash., and Christopher J. Dodd, D-Conn., introduced the proposal after an article in The New York Times identified several lenders that had stopped offering federally guaranteed loans at community colleges and some four-year institutions.
"Lenders offering loans backed by taxpayer dollars shouldn't be able to discriminate against certain schools or students," Murray said in a statement. "Denying loans based on school, program length, or income level locks the door for far too many."
Lenders have said they were responding to the small number of borrowers and the small amounts borrowed at certain institutions. Financial aid administrators countered that selective lending could make it harder for poorer students to pay for higher education. They argued that lenders participating in the program should not be allowed to cherry-pick.
"If they're in the business, they're in the business, and it's the entire business," said Kristin Shear, president of the California Community College Student Financial Aid Administrators Association and director of student financial services at Santa Rosa Junior College. She called the legislation a logical step.
"To me, this ensures access," said Korey Compaan, director of financial aid at William Jessup University in Rocklin, Calif., who supported the proposal, "at any size university."
But other financial aid officials worried that it could have the undesirable effect of pushing lenders out of the Federal Family Education Loan Program, as the guaranteed loan program is officially named.
"Banks are not philanthropic agencies," said Pat Watkins, director of financial aid at Eckerd College in St. Petersburg, Fla. The institution was recently informed by Wells Fargo that the bank would not extend loans to its students anymore, Watkins said. If lenders cannot make the profit they require on loans, she said, "a lot of the banks will just say, we're out of the business completely, you pushed us out."
A Wells Fargo spokeswoman said it made changes in eligibility because of new laws governing federal loans that "prevent us from making a reasonable rate of return."