Debt Financing 101

For parents seeking reassurance that their college-bound children will have access to student loans, Larry Warder, CFO at the U.S. Department of Education (DoE), has good news and bad news.

As CFO since April 2006 (and acting chief operating officer of the Federal Student Aid program since June 2007), Warder has been trekking back and forth between his office and Capitol Hill to help Education Secretary Margaret Spellings and Treasury Secretary Henry Paulson win wider federal support for student lending. Hence the good news: In May, as the private sector stumbled, legislators enacted special emergency provisions to shore up the $80 billion Federal Family Education Loan Program.

Emergency powers will allow the DoE to buy federal loans that private lenders originate for the 2008–2009 academic year, furnish short-term liquidity to student lenders without access to capital, pursue means for lenders to tap capital markets more efficiently, bolster a lender-of-last-resort program to buffer students against adverse market forces, and enlarge a direct-loan capacity by $2,000 per semester.

And now the bad news: Having helped engineer a rescue effort, Warder cautions that a larger problem looms — the rising cost of college has outpaced family incomes by as much as four-to-one. "This becomes not a financing issue," he warns, "but an affordability issue." The availability of loans provides scant consolation if soaring tuitions burden graduates with vast debt. "Many more students should be thinking about how to stay home and go to a two-year community college," Warder advises, "and finish at a four-year college."