Lending for learning - private sector provides low-interest student loans

Nation's Business, April, 1990 by Joan C. Szabo

Lending For Learning

At a time when the nation's businesses are stressing the importance of a better-educated work force, federal aid to college students is expected to face further budgetary reductions in the 101st Congress.

To address the growing need for college financial assistance, many business people are launching innovative ways to help educate tomorrow's work force. One highly succesful initiative is the private-sector loan program called ConSern. Providing students and their families with low-interest loans that can be paid back over a 15-year period, the program is especially beneficial for middle-income families, who often fail to qualify for many of the federal assistance programs.

"Growth in the 3-year-old program has been phenomenal," says the Rev. John P. Whalen, ConSern's founder and president. To date, nearly 11,000 firms are enrolled, and more than 5 million families are eligible to apply for ConSern loans. The program has disbursed over $100 million in loans so far.

Whalen expects disbursements to reach $200 million this year. "We have just scratched the surface," he says. "The cost of college keeps rising, and people are having to look more toward loans to get their kids through college."

Due to its unprecedented growth, the program now is one of the country's top private lenders for supplemental student loans, and it ranks among the top 30 U.S. lenders for student loans of any kind, says Whalen.

ConSern has been designed by leaders in higher education and business, it is backed by major financial institutions, and it is administered by a nonprofit organization.

To offer this loan benefit to employees, companies must maintain membership in the U.S. Chamber of Commerce. Once membership is established, employers can participate in the loan program for as little as $25 a year, based on the number of employees. The participation fee is tax-deductible as a business expense.

The program is especially easy for employers to offer as a benefit. When a company signs on as a participant in the program, a corporate accounts manager from ConSern provides the employer with informational brochures and application packets to distribute to employees. In addition, ConSern supplies a complete communications package to help companies explain the program to employees.

ConSern takes care of loan processing and employee inquiries. Companies offering the program assume absolutely no liability when the loans are made available to employees.

The loans may be used by an employee and his or her family for private secondary schools and for both undergraduate and graduate programs in accredited colleges and universities. The loans are available for many education-related expenses, including tuition, room, board, books, and computers.

Employers who participate in the program say it is extremely worthwhile. "It is an inexpensive way to provide an important benefit to our employees," says Bruce Mindlin, controller of Airoyal Co. Inc., an industrial-parts distributor in Maplewood, N.J. Mindlin says about five of Airoyal's 30 employees currently use the program.

One of ConSern's most attractive features is the size of the loan offered. An employee can borrow up to $25,000 each year and up to $100,000 altogether. The average size of a loan now issued is $6,200 per year.

In addition, it is possible to take up to 15 years to repay the loan. The principal may be deferred while the student is in school, up to a maximum of four years' deferral. Interest payments still must be made. They start approximately 30 days after the loan is disbursed. A ConSern loan may be repaid at any time with no prepayment penalty.

Commercial lenders, on the other hand, typically will lend no more than $5,000 for an unsecured loan and require repayment - both principal and interest - over three to five years. There generally is no deferral of principal repayment with a commercial lender. Interest rates typically are 4 to 8 percent higher than the interest rate on ConSern loans.

To apply for a loan, the student must be accepted or enrolled in courses leading to a degree or a diploma. In addition, the student or the cosigner must meet ConSern's credit criteria, which consist of an evaluation of credit reports and information on income and debt. The borrower pays a one-time discount fee of 3.5 percent to cover insurance on defaults.

The default rate on the program is extremely low - "less than 1 percent," says Father Whalen. He attributes this to the fact that the loans are made on the basis of credit requirements. Unlike the federal education-loan program, ConSern loans are not made on a family-income test.

Interest rates for ConSern loans are competitive. They are tied to the commercial paper rate, and they fluctuate accordingly. During 1988, the rate for ConSern loans averaged 11.95 percent.

If an employee receives a ConSern loan and later leaves the company, the loan remains in effect even though the borrower no longer may be connected with a participating company.

During 1990, ConSern plans to provide several enhancements to the existing loan program. It will offer a homeequity loan feature, which could allow tax deductibility of interest charges.