Independent Schools Exploring Private Student-Loan Plans
As national debate continues over the Reagan Administration's tuition tax-credit plan, efforts are under way in the independent-school sector to expand the use of low-cost loans as a means of financing private, precollegiate education.
The concept, its supporters suggest, provides a promising alternative to the controversial federal-aid plan for private-school students.
Now a staple of financial-aid programs in colleges and universities, awarding low-interest loans is a largely new but growing practice in private, college-preparatory schools. But two developing projects are expected by their sponsors to stimulate growth in loan programs in independent schools.
If successful, they say, the efforts could significantly enlarge the scope of private-school student-aid programs.
One of the programs, Parental Loans for Elementary and Secondary Education, known as please, is a pilot project of the Massachusetts Higher Education Assistance Corporation (mheac), the agency that guarantees loans to the state's college students. please is currently seeking private financing to underwrite a guaranteed-loan program to be tested in a limited number of independent schools in Massachusetts in the 1983-84 school year. Private lenders would make the loans.
In December, the National Association of Independent Schools (nais) will launch its Loan Program Information Service to examine and disseminate information on current loan practices among its member schools. Longer-term aims of the program are to establish standards for "good practice" in loan administration and to stimulate new sources of funding.
Those efforts, in conjunction with a $10.5-million foundation grant made earlier this year to increase the size and number of independent-school lending programs, signal growing acceptance of the new concept of financial aid among parents, schools, lending institutions, and charitable givers, according to representatives of both groups.
Low-cost loans have "great ramifications" not only for increasing low- and middle-income families' access to private schooling and expanding the amount of aid available generally to students, but for public policy relative to private schools, according to the spokesmen.
The independent-schools association has issued public statements supporting lending programs as an "alternative" to federal tuition tax credits, which the group opposes.
And mheac, which is developing please, was the first loan agency in postsecondary education and was a model for the federally guaranteed college-student loan programs, according to Regan Kenyon, a consultant to the state-chartered corporation. If tax credits fail to win Congressional approval, "the federal government could look to us again," he said.
The Massachusetts loan agency arrived at the idea for please about two years ago, according to Mr. Kenyon, in the wake of a marked increase in inquiries from educators and parents about the availability of loans to finance private elementary and secondary education. Although the mheac is barred by its state charter from working with loans for that level, it decided to explore the financial viability of the concept.
Following several studies and consultations with bankers and private-school officials, mheac decided to create a separate nonprofit agency, The Education Fund, Inc. During its pilot program, the fund will maintain the capital to guarantee the loans to families made by commercial lending institutions in the state.
Financial backing for the Education Fund will come from private charitable sources, Mr. Kenyon said. The group is seeking money primarily from national and multinational corporations, rather than foundations.
Corporations seem to be receptive to the idea, he said, because their money would support many more schools and students than grants to single institutions. It also appeals to bankers because the loans involve little risk. The schools, themselves, would have to put a relatively small amount of money in reserve against default.
According to John Bachman, who is both vice president of nais and a member of the task force working on please, low-interest, guaranteed loans have a number of advantages for independent schools.
"It's a wonderful way to re-use dollars as far as the institution is concerned. It extends the financial-aid dollar directly and indirectly," he said.
Middle-income families, who might not qualify for direct aid but are unable to pay the full cost of private education, receive assistance, while the schools reserve direct-aid scholarship funds to support low-income students.
In 1980-81, the association's member schools awarded $100 million in scholarship aid to about 16 percent of their 51,000 students. Although that figure represents a "tremendous jump" from the $70-million awarded two years earlier, Mr. Bachman said, there has also been a noticeable "drift in the direction of schools asking parents to pay full cost."
Traditionally, many independent schools have charged fees equaling roughly 75 percent of the actual cost of supporting a student, with endowment income or charitable gifts making up the difference.
The rising costs of attending independent schools and a poor national economy, among other factors, have strained the schools' financial-aid resources, making lending propositions even more appealing to parents, schools, and lending institutions. (See Education Week, June 2, 1982.)
Moreover, said Mr. Bachman, the experience of the few independent schools with well-established lending programs is that "the loans have a low default rate, low administrative costs, and the dollars come back with some income to be reinvested and put to work for the financial-aid program."
In the space of a few years, he said, loan programs have grown from a handful to about 200 among the approximately 900 schools belonging to the national association. But they vary enormously in interest rates, pay-back provisions, dollar limits, qualification requirements, and administrative procedures.
The nais loan information program, supported by the Geraldine R. Dodge Foundation, is to "help schools cut through this phenomenon and to address the questions of what kind of program, for what kind of school, for what families," Mr. Bachman said.
"We also expect this to be generative," he added, "to bring to the attention of the charitable sector the [significance of] the Independence Foundation initiative,"--the $10.5 million awarded to 85 independent schools last February. (See Education Week, February 17, 1982.) The association hopes that its loan-program efforts will spur additional giving.
Lending for private-school education, said Mr. Kenyon of mheac, "is here in a sense it has not been previously." One change is that parents are beginning to accept the idea of borrowing for elementary and secondary schooling, even when they face further borrowing to finance their children's higher education.
But more significant, said Mr. Kenyon, who is a former indepen-dent-school head, the loan programs under consideration now involve a supply of capital. A number of schools' lending programs have, in fact, amounted to scholarship programs "where you ask for the money to come back," he said. Such deferred-payment programs might or might not charge interest, and are by necessity of limited scope since few schools can afford to operate without "money up front."
With loans provided by lending institutions, the please project will enable the schools to receive full payment at the time a student enrolls. And last week, officials of the program were to meet with representatives of 12 Massachusetts schools to discuss various loan plans.
The details of the program's operation will be decided upon in the next few weeks, Mr. Kenyon said. Ideas under consideration involve interest rates below the prime rate and a plan enabling schools to "buy down" the interest rate on a commercial loan (known as buying points) to provide lower interest rates for parents.
Such an arrangement, Mr. Kenyon said, would, in effect, allow a school to set the interest rate on a loan based on its assessment of a family's financial need.
Although please is a modest experiment, he said, the fate of the tuition tax-credit bill and developing a program suitable for Catholic schools could lead to a greatly expanded future for such programs.
Loan programs patterned after the federal Parental Loans for Undergraduate Students (plus) program for higher education would be far less costly than the $3 billion that the Administration's tax-credit proposal is expected to cost. According to a Congressional Budget Office study of several years ago, Mr. Kenyon said, such a federal loan program would cost about $118 million.
Additional public-policy considerations for privately sponsored programs such as please are that they "won't have a deleterious effect on public education" and that they can tie a school's eligibility for the program to nondiscriminatory policies, Mr. Kenyon said.