Banks Don't Belong in the Student Loan Business

Since I arrived in Washington, I've been looking at every line item in the budget of the U.S. Department of Education with two questions in mind: Is this program helping students learn? And is it a good use of taxpayer money? In the case of the Federal Family Education Loan (FFEL) program, the answer to both questions is no.

Under the current FFEL program, banks make loans to students. While those students remain in school, the federal government pays the interest on their loans; otherwise the interest accrues. Once the borrowers leave school or graduate, the lending agency collects on the loans. But if the student defaults, my department pays back the loan—plus the interest owed. The FFEL program, in short, is a great deal for bankers but a terrible one for taxpayers.

Over the next decade, according to the Congressional Budget Office, the Education Department is slated to subsidize banks to the tune of $87 billion to enable them to make federal student loans. All of this money would be put to better use providing financial aid directly to millions of needy students who want a college education. The Education Department will be able to accommodate the new loans through an existing federal public-private partnership, Through that partnership, the federal government makes loans directly to students and uses companies that will provide better service to borrowers at a lower cost to taxpayers

Critics contend that the government is trying to nationalize a private industry and do away with competition. Our real aim is to simply stop using banks as the middle man for student loans.

The banking industry would continue to compete in the marketplace to finance mortgages, business start-ups, and other forms of credit. But we are intent on stopping subsidies to bankers who make student loans at no risk because they know the federal government will bail them out in case of default.

By working with private sector companies with expertise in the field, we are prepared to initiate all new student loans in the existing federal Direct Loan program. Right now, the Education Department already owns and services 80% of the student loans made last year. It owns such a high volume of loans chiefly because it had to take emergency action in 2008 to ensure students had access to loans when lending in the nation's credit markets was frozen.

Our experience handling the bulk of student loans makes me confident in our capability. This year alone, an additional 500 colleges and universities joined the Direct Loan program. Just last month, the department's independent inspector general's office issued a report documenting that the Education Department had taken the right management steps so that all loans can be serviced by the Direct Loan program.

In a recent survey by the National Association of Student Financial Aid Administrators, schools that have made the switch to direct lending overwhelmingly reported the conversion was easy and quick. That is just one reason why that association of financial aid experts, along with organizations representing the nation's largest public and private universities, community colleges and college students, support the department's Direct Loan proposal.

The private sector would continue to play an important role in servicing loans. Last summer, the department's Federal Student Aid Office awarded contracts to four companies to service federal student loans, following an intense competition among the best companies in the loan servicing business. These companies are paid more when borrowers are in good standing, and those that keep defaults down and provide the best customer service will be given the most work.

We are preparing to make the switch to direct loans as easy as possible for colleges and universities. We appreciate their feedback, and their ideas will help us transition smoothly from FFEL to direct loans once Congress has passed a bill authorizing the switch to 100% direct loans

As for the $87 billion we'll save from ending the troubled FFEL program, the administration seeks to use that money for important programs that will improve our economic future. We propose to substantially increase scholarships in the Pell Grant program and other financial aid for low-income students. We would start new programs to raise college graduation rates and strengthen our community colleges. We will expand our investment in early childhood education. Plus, $10 billion would be set aside to reduce the deficit.

Now is the time to allocate resources to students—not to banks—so they have access to college and other educational opportunities. We cannot in good conscience let $87 billion in subsidies go to banks when our students desperately need financial help to realize the dream of getting a college education.

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Business owners air loan complaints

HAGERSTOWN — They’re designed to help struggling small businesses stay open, refocus and get their cash flow back on track in the struggling economy.

But local business owners complained Monday night at City Hall that special loans for businesses through the U.S. Small Business Administration are slow to get approved.

Provided under the American Recovery and Reinvestment Act, the interest-free loans are for up to $35,000. They are intended for established, viable businesses that need short-term help with their debts.

But Al McGarity said he and six other people were turned down for the loans even though they met all the program’s qualifications.

McGarity, owner of Robbies Billiards and Game Room Outfitters in Williamsport, said the bank told him and the others that the Small Business Administration turned down their loan requests.

McGarity told Edward Knox, lender relations specialist for the SBA, that the bank claimed that the SBA did not give a reason for the loan rejections.

Knox said the SBA will give reasons for rejecting loans, including that the borrower was not a U.S. citizen or that the person had too much money on hand to qualify.

Knox said the fact that McGarity was told that the SBA did not give a reason for the loan rejections did not give him a “warm and fuzzy” feeling.

Banks are saying the loans are not lucrative enough for them because no upfront fees can be charged, according to Knox.

One woman in the audience of about 20 people wondered if President Obama knew about the drawbacks of the loan program.

Knox said he is sure Obama would flip a switch to correct the situation if he could.

“But there is only so much he can do. There is only so much Congress can do,” Knox said.

Brent Bailey of Interstate Communication Services, an information technology company, stood up during the meeting and walked to the front of the room.

Bailey told Knox to let him know if some kind of incentive is offered to banks to stimulate the flow of loans.

“Then I’m in,” Bailey said.

“Without it, it’s just talk,” said Bailey, who left the meeting.

“It sounds like our banks are stopping us at the door,” said another woman in the audience.

The City of Hagerstown hosted the meeting so people could share their experiences with the program and offer ways to improve it.

Knox offered possible solutions, like going back to a bank again after an initial loan rejection. The bank might have changed its mind about the loans, Knox said.

Business owners can let banks know they are not happy about their decision not to offer the loans, Knox said.

Business owners also can take their business to another bank, although there might be a waiting period with the new bank before a loan can be considered, Knox said

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North Dakota improves in business tax rankings

North Dakota ranks squarely in the middle of states in a study that compares how each state taxes business. The Tax Foundation review gives much better rankings to neighboring South Dakota and Montana.
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The Washington, D.C.-based organization, which produces an annual report on the business tax climates of states, ranked North Dakota 25th among the 50 states in its most recent survey, after four years of ratings in the low 30s. The foundation's rankings are considered important by legislators and economic development officials.

South Dakota, which has no individual or corporate income tax, was ranked first, while Montana was rated sixth among the 50 states, the survey said. Minnesota's business tax climate was ranked 43rd.

Cory Fong, North Dakota's tax commissioner, said the Legislature helped improve the state's standing by cutting individual income and corporate tax rates and reducing the number of corporate tax brackets from five to three. The Tax Foundation's ratings favor states that impose no income tax at all or that have only a single tax rate, instead of progressively higher rates on larger incomes.

North Dakota's tax system may never attain a top rating because tax collections are spread across income, sales and property, Fong said.

"Having a balanced tax structure is helping us immensely during these difficult times, and I think that is an overall strength that businesses are looking at," Fong said. "We've done a good job of demonstrating ... that having the right level of taxation across those tax types makes some sense."

The foundation's ratings included the 2009 Legislature's across-the-board reduction of state income tax rates, which lowered the top individual income tax rate from 5.54 percent to 4.86 percent, and the lowest rate from 2.1 percent to 1.84 percent of state taxable income.

It did not take into account the Legislature's corporate tax changes, which reduced North Dakota's number of corporate tax brackets from five to three, cut the top tax rate from 6.5 percent to 6.4 percent, and applied the top rate to income greater than $50,000. Previously, the maximum tax rate was assessed against corporate income greater than $30,000.

Nationally, North Dakota has been one of the few states where the state government budget is in surplus. Dustin Gawrylow, director of the North Dakota Taxpayers' Association, an advocacy group based in Bismarck, said the state's rankings improvement should be credited to North Dakota's tax cuts and moves to raise taxes in other states with less robust revenue collections.

"Unlike a lot of states, we're not getting any worse," Gawrylow said.

Gawrylow said North Dakota's rankings when compared to South Dakota, Montana and No. 2-rated Wyoming are more worrisome. North Dakota economic development officials appear to put more emphasis on offering tax incentives to selected businesses than on having lower tax rates on all companies, he said.

"We've got to really look at how we can compete regionally," he said. "We need to look at how we can match Wyoming, South Dakota and Montana on those factors that companies are looking at when they come to North Dakota to look for where to place their factories, or their jobs."

The report analyzes a number of taxes that affect businesses, including income and sales taxes, unemployment insurance rates and property taxes.

On property taxes, which are the subject of frequent complaints by business and home owners alike, the report ranks North Dakota fifth among states, while giving less favorable scores to the state's corporate and individual income tax laws.

Fong said that is where he sees "some fundamental flaws" in how the report depicts North Dakota. "Perhaps the measurements they are focusing on don't necessarily coincide with what people in North Dakota are concerned about," he said. ...Read More ! ⇒

Yahoo seeking up to $500 million for small business unit

SAN FRANCISCO/NEW YORK (Reuters) - Yahoo (YHOO.O) hopes to get up to $500 million for a unit that hosts websites for small companies, after putting it on the market for several months, two people familiar with the matter said.

Yahoo has received interest from corporate buyers and private equity firms, one of the sources familiar with the situation said. It is unclear if any party has made an offer.

But some potential corporate buyers who have looked at the asset in recent months have decided not to bid because they think the price is too high, a second source said.

"Yahoo's price expectations are higher than what buyers were willing to pay," this person said, adding that Yahoo was seeking $350 million to $500 million. "People would like to own this asset, but not at the asking price."

As part of its strategy to shed assets that are no longer core to its brand, Yahoo put the unit called Yahoo Small Business up for sale about six months ago, along with HotJobs, its online job classified site, the sources said.

Last week, Yahoo sold its stake in China's top e-commerce company Alibaba.com for $150 million.

The sources spoke on condition of anonymity because the sale process has not been made public. A Yahoo spokeswoman said the company does not comment on rumors or speculation.

The small business division provides domains, email, Web hosting and other merchant services to customers. Sunnyvale, California-based Yahoo, which posted $7.2 billion in revenue last year, does not break out the unit's performance.

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U.S. business: welcomes Obama export control review

U.S. high-technology exporters on Friday welcomed President Barack Obama's decision to undertake a comprehensive review of U.S. export controls rooted in Cold War fears of the former Soviet Union.

"The economic and security challenges our country faces continue to grow more complex, and we must have a modern export control system that protects U.S. technology while allowing us to cooperate and trade with our close allies and partners," Marion Blakey, president of the Aerospace Industries Association, said in statement.

Many U.S. companies are frustrated by licensing and procedures that limit export sales of commercial high-tech goods that also have military applications. They complain countries such as China can easily buy some of the technology on the open market from other suppliers.

Beijing also has pressed Washington to loosen restrictions, arguing that would help close the U.S. trade deficit with China, which reached a record $268 billion last year.

"The U.S. has one of the most robust export control systems in the world," White House spokesman Robert Gibbs said on Thursday. "But it is rooted in the Cold War era of over 50 years ago and must be updated to address the threats we face today and the changing economic and technological landscape."

That statement accompanied Obama's decision to extend the Commerce Department's emergency authority to continue administering export controls for another year.

The 1979 Export Administration Act expired in 2001 and since then Congress has been unable to agree on reforms to replace the highly technical piece of legislation.

"Export control reviews are frequently announced, occasionally begun, and never completed. The really good news will be when it is finished," Bill Reinsch, president of the National Foreign Trade Council, said in a statement.

Representative Howard Berman, chairman of the House of Representatives Foreign Affairs Committee, has already begun a congressional review of U.S. export controls and plans to introduce reform legislation early next year.

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In Pursuit of Small Business Loans !

At a recent meeting with Frank Burke, right foreground, who was representing Senator Frank R. Lautenberg’s office, South Orange business leaders discussed the need for credit. From left, Carole Anzalone-Newman of Main Street South Orange; Brian Boele of Bonte; Terrence Brooks of Vision Barber Salon; and Evelyn Lee, a reporter from NJbiz.com.


Joanna D’Angelo knows that starting a new business is no small accomplishment. Dealing in fine organic tea and jams from France, Ms. D’Angelo set up Tea Together, her storefront in Millburn, last November.

“We felt it was an up-and-coming area, and it was right for us,” Ms. D’Angelo said.

Business has not been bad, but she needed a small loan to keep momentum going until the busy season. While shopping for loans last month, Ms. D’Angelo walked into Chase, a preferred lender of loans backed by the federal Small Business Administration, and walked out a short time later — minus any money.

“We tried a few other banks, but they all had impossible conditions,” she said. “We did not qualify for an S.B.A. loan, something they were very adamant about.”
According to Ms. D’Angelo, Tea Together failed to qualify at Chase because the business was fewer than three years old, though she did not know if that was the Small Business Administration’s or Chase’s rule.

Ms. D’Angelo joins other owners of small local businesses who are finding credit hard to come by, even with the help of federal stimulus money directed to help. The dearth of small business loans nationally described in The Times’s article on Thursday seems to be playing out locally as well. So far in South Orange, only four S.B.A. loans have been approved from Oct. 1, 2008, through the end of June 2009, according to federal statistics. This is down from eight loans in the last financial year, from Oct. 1, 2007, and Sept. 30, 2008.
An S.B.A.-backed loan is intended for small businesses that might not qualify for a commercial loan. After being rejected, a small businesses can apply, often at the same bank, for an S.B.A.-backed loan.

Since the financial crisis began in September, the credit market dried up, hitting small businesses hard. In response, $730 million from the federal stimulus package was funneled to increase the guarantee on S.B.A. loans to 90 percent. However, even with the guarantee, loans can be hard to come by.

But who is responsible for the bottleneck? Is it the S.B.A., where mountains of paperwork are required? Or are the banks not wanting to go the extra mile to assist small businesses? Or perhaps, are small businesses considered a poor investment?

From the eyes of the banking industry, the problem centers around the red tape that entangles all areas of the S.B.A. loan process.

Sheila Spangler, who worked in the banking industry for more than 20 years and is now a business strategy coach, said she believed that banks are not lending because of the excessive paperwork required for an S.B.A. loan. Banks and the S.B.A. have their own qualifications, and both apply when a small business wants a loan.

“Just because the S.B.A. may be willing to guarantee the loan, the bank may not necessarily want to make the loan,” said Ms. Spangler, who calls herself a proponent of the federal agency.

She explained the S.B.A. guarantee is not real money. It is available only if the borrower defaults, so the bank must initially provide its own money for the loan. And when it comes to receiving the guarantee, from her own experience and from being in constant contact with bank managers, Ms. Spangler said it can take one or two years.

“It is a long, drawn-out process,” she said.

Furthermore, if the borrower defaults, there is also a chance that banks will not get their money back from the S.B.A.

“If the bank does make the S.B.A. loan, the package has to be done perfectly, or the bank risks not being able to exercise the government guarantee,” Ms. Spangler said.

Jonathan Swain, a spokesman for the Small Business Administration in Washington, countered that it did not take terribly long for a loan to receive a guarantee.

“We have made a commitment to lenders to turn their application around in 45 days or less,” Mr. Swain said, referring to the amount of time it takes banks to receive the guaranteed amount for a defaulted loan. He said the S.B.A. averages a 30-day turnaround, and that 95 percent of the guarantees on default loans are paid to banks.

Mr. Swain also noted the low default rate on S.B.A. loans in the first place.

“Our default rate is about 5 percent,” he said, “which is more than what it was historically. However, that is what you would expect in this economic time.”

A new initiative of the S.B.A., America’s Recovery Capital Loan Program, is also causing confusion for some would-be lenders. Operating for less than two months, this program provides $35,000 in short-term relief to struggling small businesses. Like in a standard S.B.A. loan, the business must be eligible by the standards of both the S.B.A. and the commercial lender.

“Over 1,000 A.R.C. loans have been offered across the country,” Mr. Swain said. “We feel good about where it is, and we expect to see those numbers go up.”

But so far, only four of those loans have been in New Jersey through the lenders JPMorgan Chase & Company, PNC Bank and Woori Bank. (They tend to head to businesses in Minnesota, Wisconsin and Iowa, according to The Boss blog.)

While there are 190 banks in New Jersey that partner with the S.B.A., some are part of the preferred or certified lenders program, and are able to get an accelerated application process for loans they approve. Here is a list of those banks [pdf].

Ms. Spangler said A.R.C. provides little incentive for commercial lenders to administer the loan.

“The mound of paperwork and knowledge is the same as for a million-dollar loan,” she said of the relatively small A.R.C. loans.

Mr. Swain said this was necessary to prove that the business was viable and still a good investment.

Elizabeth Boele, co-owner with her husband, Brian, of Bonte, a cafe and waffle shop on South Orange Avenue, was not granted an A.R.C. loan because she could not demonstrate financial difficulty on paper, a qualification for the loan. Instead, the business had been cutting back in other areas to avoid defaulting on other loans.

“If we had not been making our repayments, we would have been better off,” Mrs. Boele said she told an S.B.A. representative recently.

Mr. Swain encouraged business owners like this to speak with the New Jersey S.B.A. office, as options still might be available to them.

There are some who argue that market forces, not the government, should determine who stays in business. While the S.B.A. loans may be helpful, are they keeping people afloat who simply should sink?

“Small business that are barely making it should not get a loan,” said Mary Anne Spencer, from the Tenth Muse Gallery in Maplewood, who was able to use her own equity to start her business. “People are going in with no business plan, no demographic study … what are you going to give them a small business loan for?”

Ms. Spencer was concerned for those small businesses that were barely breaking even, operating under false hopes that the economy will suddenly improve, and taking on the added burden of new debt.

“People’s spending has changed, and it is going to stay that way for some time,” she said.

When this thought was posed to Mr. Swain, he said he believed that many of the businesses the S.B.A. supports have been profitable businesses that need an extra hand.

“There are a lot of good, viable small businesses who do not have access to the capital that they would have had in good economic times,” he said. Mr. Swain said S.B.A. loans were useful to businesses that were in the “maybe stack” of getting a commercial loan, and he stressed the loans were not there for businesses that are not viable.

Mr. Swain did have some good news for small business regarding the dollar amount of S.B.A. loans recently. Since February, “we have actually seen our loan volume increase 50 percent,” he said. “July was the highest months in terms of volume since last September.”
Source: NYTimes
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