I have a friend in Boston whose parents, due to our current economic situation, are near bankruptcy. His dad works in radio (seemingly an unstable career) and his mom hasn’t worked in years. Both of them used to vote Republican, supported the laissez faire economic policy of the current government (read regime) and were very much against socialized medicine. Now they find themselves in a sticky position. At 54, his dad isn’t the most desirable applicant for a radio job, and they sold their house and cars to keep going. Last I heard, they were both looking for jobs at Starbucks.
Despite the media frenzy surrounding the “economic crisis,” the real economy has been experiencing a slowdown for some time. The speculative bubble has burst and property values are plummeting. As a result people have been spending less, meaning business is suffering and in turn unemployment is rising. In the US, banks and other financial institutions have been given a fair amount of free reign, and it is this lack of regulation that is partially responsible for the presentfnewsmagazine.com been spending more than they have and institutions have been over lending.
Things weren’t good before the crisis hit, and they certainly won’t be getting better for a while. There are a number of detrimental ways this is currently, or could soon be, affecting art school students (yes, that’s you). Let’s start with student loans.
To begin with, your parents might be experiencing major financing difficulties. Families who have borrowed home equity loans in the past are likely experiencing the effects of the housing bubble bursting and may be looking forprivate student bank loans for the first time. The mortgage loan system (explained in our handy economics guide) has many parallels to the student loan system. “When investors started losing money on the securitizations of subprime mortgages,” says Mark Kantrowitz, publisher of the student loan counseling site FinAid.org, “they also stopped investing in other securitizations, including those of student loans. When education lenders have been unable to raise money from the capital markets, they’ve had to stop making student loans.”
“There are a number of banks who are no longer issuing private loans,” says Rose Milkowski, VP of enrollment management at SAIC. “Back in september, 134 lenders dropped out of the program altogether, and another 33 lenders have suspendedprivate student loans. If a student has a loan currently, that will be honored, but some students picked semester-long loans, so they are really who we are focused on right now. Banks are also getting much stricter with their credit-worthiness ratings. People who have adverse credit levels might have a much more difficult time.”
“A proactive thing that families can be do is to pull their credit records and begin working on any negative information that’s on there,” says Brian Esker VP of finance at SAIC.
Beyond ironing the negative credit out of your records, though, Esker suggests parents and students look into the Federal Parent Plus Loan. “It’s a federal loan,” he says “that the parents can defer, which is a brand new option this year, so they don’t have to make payments on the loan while the student is in school. One of the neat things about theFederal Plus Loan is that if they are unable to approve you upfront, the lender will work with you to try and clean up your credit record. In addition to that, we can take any denials from a Plus loan and offer our students an additional stafford loan.”
Beyond student loans, there is the issue of recent and impending graduates. A major criticism of art schools in general, and one that can be fairly leveled at SAIC, is that students are ill prepared for the real world, with little knowledge about surviving financially as an artist, or employing their creative skills in a given field. How many undergraduates, especially, come out knowing how to write basic grant or funding applications? How many are aware of the kinds of jobs available to them? Now these questions are particularly poignant. Finding a job in the arts sector is incredibly competitive anyway, and this is made worse by the fact that it’s very difficult to find any job anywhere right now. You can pretty much forget selling your art.
“For people who are just coming out of school,” says economist Sarah Peters, “and who are not probably planning on selling their work for a million dollars or more immediately—it’s going to impact their opportunities to sell their art to a great extent.”
Barack Obama’s arts policy is currently being circulated to arts educators, administrators, policy makers and artists. Major aspects of this policy include increasing funding for the NEA (McCain wants to either slash or terminate it!), expanding public and private partnerships between schools and arts organizations, and providing artists with affordable healthcare and fair taxes. The report bodes well for students at art schools, and perhaps increased resources in these areas will lead to new loan and grant opportunities.
Peters agrees: “It’s possible that there may be, as a result of a new concern that the US is falling behind in education, new opportunities for loans and grants as we appreciate how important this education is for the US economy to remain strong both in the short term and in the long term,” she says.
So maybe there’s hope yet. And if not, perhaps now is the time to make some noise about the shockingly high tuition fees universities in the USA expect students to pay, especially at private art institutions like SAIC. In my arts administration classes we’re always talking about how to diversify the art world, both in terms of the artists exhibited and the consumer public for art. Looking around at the classes and faculty, though, it seems obvious that diversity needs to begin here.
Student Loans and financial aid
Ah yes, the good old subprime mortgage crisis. You’ve heard the term a million times, but here’s what it means. A mortgage, from the Old French words mort, or “death,” and gage, “a pledge,” allows a homebuyer to purchase real estate without putting up the entire amount up front, instead making a series of payments over a period of time, just like buying a new fridge on layaway. Subprime refers to someone who is a risky bet for credit, meaning there is a good chance that person will default, or be unable to make his payments, due to his low income level or a poor credit history.
Housing market boom
In the beginning of this decade, the housing market in the United States was booming. Houses have always been an excellent financial investment—demand keeps growing as the population swells, and houses increase in value over time. Banks who provided mortgages were giving them away to practically anybody, especially subprime borrowers, who signed up in droves for adjustable-rate mortages (ARMs), allowing them during an initial period to pay only the low-rate interest, after which the the monthly payment totals became subject to change over the life of the loan. They thought would have an easy ride and refinance later when the rates rose. The percentage of Americans who owned homes shot up … as did their credit debt.
Real estate investment
At first it seemed like everybody was winning. Real estate investors were snapping up condos before they were even built, then quickly “flipping” them, the process of buying low and selling high, just like the stock market. Credit limits were sky-high and the money was pouring in. So the townhouses kept rising and the subdivisions kept sprawling, until supply eventually exceeded demand. Sometime in 2006, the surplus of homes for sale began driving down prices. People couldn’t refinance their homes and began defaulting on their loans, unable to meet increasing interest rates and payment amounts.
Banks began foreclosing on these properties in astonishing numbers. The result of their sudden possession of thousands of worthless properties was a liquidity crisis. As investors lost confidence in the mortgage loan system, the cash flow they provided to financial institutions dried up, depriving banks of the one thing they need to do business: money.
Add to this the fact that everybody in America is trying to save right now: consumer spending is barely trudging along but unemployment is speeding. People don’t go on shopping sprees when they can’t pay their bills.
Cash flow crisis and emergency solutions
“Banks need capital to operate,” explains John Cochrane, Professor of Finance in the MBA program of the University of Chicago, on a New York Times blog. “In order to borrow another dollar and make a new loan, a bank needs an extra, say, 10 cents of its own money (capital)—so that if the loan declines in value by 10 cents, the bank can still pay back the dollar it borrowed. If a bank doesn’t have enough capital—because declines in asset values wiped out the 10 cents from the last loan—it can’t make new loans…. The core of any plan must be to recapitalize the banking system.”
Congress tried to offset the recession with the February 2008 Economic Stimulus Package, which sent a total of $168 billion to American taxpayers, or a couple hundred bucks each, with the hope they’d spend it immediately and re-infuse the economy with cash. It’s not working.
So in early October, the Emergency Economic Stablization Act was enacted, allowing the Secretary of the Treasury access to $700 billion to bail out failing banks, taking over their debt. It’s a controversial move. The government claims it will have an immediate and wide-spread stablizing effect on the U.S. economy, restoring investors’ confidence and increasing credit availability and cash flow. It’s hasn’t worked yet either. Detractors say it’s like giving a Band-Aid and a lollipop to someone with third-degree burns on ninety percent of his body.
Student loans and the financial crisis
The mortgage loan system has many parallels to the student loan system. Both are controlled by a process called securitization. Say a certain bank loans money to a thousand students. The lender takes those thousand loans, puts them together in a trust, and sells shares of that trust to investors. The investment is backed by the promise of income received as the students make payments on their loans. The investors have a sure bet that this income will be steady, and the lender wins because it gets back the principal balance on the student loans, as well as up-front profit from investors. The more loans in the trust, the more profits for the lender.
But now everyone is afraid of securitization. The financial crisis has made it harder to find investors, so lenders must provide them with higher margins as an incentive, meaning less profit for the lender. An increase in student loan defaults, just like mortgage defaults, has frightened them even more.
“When investors started losing money on the securitizations of subprime mortgages,” says Mark Kantrowitz, publisher of the student loan counseling site FinAid.org, “they also stopped investing in other securitizations, including those of student loans. When education lenders have been unable to raise money from the capital markets, they’ve had to stop making student loans,” he told FNewsmagazine.
The loan system meltdown
In March, Congress passed their Ensuring Continued Access to Student Loans Act, which specifies the government will personally ensure that federal student loans will continue to be provided by its lenders through the 2009-2010 school year, and that it will step in on their behalf if necessary. The legislation also raises limits on the amount that can be borrowed and provides payment deferment options for parents until their child graduates.
Most students who qualify for federal aid receive the Stafford Loan or the PLUS loan for parents. Provided by the Federal Family Education Loan Program (FFEL), these loans have low fixed interest rates, no credit requirements, low monthly payments, and can occasionally be enough by themselves to make tuition payments. The economic crisis won’t affect them just yet, reassures Claude Walker of the Illinois Student Assistance Commission. “Students can still get Stafford loans in Illinois. The originator might change but the loans are still available.”
If the amount of federal aid a student receives can’t cover his tuition, he, or more likely his parents, have to apply for a private loan. Private loans are provided by the same sort of lender, such as banks and credit unions, state loan programs, schools, and non-profits. Private loans often have higher or variable interest rates (for example, the Stafford interest rate stands at 6.8%, but an Fnewsmagazine staffer’s private loans have a rate of 13.75%).
Private loans are sometimes the only option available to families who were denied federal loans because of new eligibility requirements as a result of the economic downturn. They are the only kind available to international students (although the Euro is getting weaker and South Korean currency is plummeting).
“The requirements for a Stafford loan have not changed,” says Walker. “However, private loans, which are made at the discretion of a bank and require a good credit history, may become more difficult to obtain … because there isn’t the capital available to make them. The credit requirements will be tighter and students attending certain types of institutions may not be able to get them.”
The loan system is facing what Kantrowitz calls a “meltdown.” More and more bank lenders are shutting down their student loan programs and abandoning the industry. 137 federal lenders and 36 private lenders have quit all or part of their student loan businesses. Not enough families can qualify for loans anymore with such strict eligibility requirements. Even if they can get loans, students end up defaulting because they can’t make their payments. The system has simply become too expensive.
The number of people now considered “subprime” is rising. It will become increasingly difficult to fund the American dream: a new home, a new car, or a college degree. Parents won’t able to borrow money against their houses to pay tuition. They’ll have to take on extra jobs and too many credit cards.
Soon our parents will reach retirement age, and then how will we students, suffocated by the urgency of our own debt, ever be able to take care of them?