HARRISBURG (TNS) — Pennsylvania’s student financial aid agency is expanding its footprint in the student lending business to nearby states. The move is seen as good news for in-state students since it will generate money to support the state grant program.
The Pennsylvania Higher Education Assistance said it will launch the Keystone Student Loan Program next week to students in New York, Virginia and Ohio. It intends to extend this private loan program to students in Delaware, Maryland, New Jersey and West Virginia in September to help fill the gap in their financial aid package after grants, scholarships and subsidized federal aid is deducted.
This new loan program complements the agency’s PA Forward loans launched in 2019. PA Forward serves only students from Pennsylvania wherever they go to college. It also serves students from any of the states the Keystone loan program will serve who attend a college in Pennsylvania.
The key difference between the two loan programs is that Keystone loans will have higher interest rates because they are financed by taxable bonds, whereas the PA Forward loans are backed by tax-exempt bonds, said David Becker, PHEAA’s vice president for student lending. Despite that, he expects Keystone loan products to offer rates that will be competitive with other private lenders and the federal PLUS loan program.
All the benefits and discounts the PA Forward loan program offers will be transferred to the Keystone program, he said. They include less strict credit requirements than what other private lenders have, flexible repayment options, a quarter of 1% reduction in the interest rate when signing up for direct payment from a bank account and a half-percent reduction as a graduation benefit, among others.
Adding another loan product to PHEAA’s portfolio is intended to generate profits that cover the agency’s costs of administering the state grant program and the additional dollars it puts into that program to supplement to state funding to make for larger grant awards along with funding PHEAA’s college planning programs.
“PHEAA does what it does really well and this is in our wheelhouse so why stop at Pennsylvania’s borders,” said Nathan Hench, vice president of public affairs, about the new program. That’s especially the case, he said, since all of the nearby states, except New Jersey, do not have a state-based student loan program and New Jersey puts a cap on the total amount of money it lends.
PHEAA was once a formidable player in the student loan scene before the Great Recession and turmoil in the capital markets caused it to cease its lending activity in 2008. It entered into a contract with the federal government the next year to act as a middleman for the federal government in collecting and keeping track of student loan borrowers’ payments.
That role became less profitable over time and PHEAA ceased being an active servicer of those federal loans in 2021. PHEAA launched its PA Forward loan program in 2019. In PA Forward’s five years of existence, it has grown to where it now holds 14% of the state’s $1.2 billion private student loan market and continues to grow, Becker said.
Taking the lessons learned from creating that program from scratch and marketing it, PHEAA officials see the new loan program as a similar moneymaker without adding a lot of new cost. Becker said New York, Virginia and Ohio have a combined private student loan market of $1.8 billion. The other states that will come into the Keystone program this fall have a private student loan market of around $600 million.
Relationships to the colleges in those other states will have to be built. PHEAA’s chief financial officer Kyle LeFever said it’s hard to say how much or how fast the Keystone program will grow and how profitable it will be for the agency. But with Discover exiting the student loan business, it creates an opening for PHEAA to grab a share of the private student loan business in those states.
“We have a pretty wide range of what that [profitability] could be,” he said. “It really depends on the market share.”
But if PHEAA is able to originate between 8% and 13% of the private student loan market in those states in the Keystone program’s first year, LeFever said it could generate around $1 million for the agency.
“It’s one of those things you kind of have to dip your toes in the water and get that baseline in year one and then we’ll be able to know,” LeFever said. “We would anticipate that year one would be fairly small but the idea would be longer term to grow that we could get revenue within four or five years exceeding $10 million.”
PHEAA used $15 million of its profits to supplement this year’s state grant program and last week, its board approved investing that same amount in next year’s grant program to keep the maximum grant award at its record-high $5,750 for a third consecutive year. Over the past two decades, PHEAA has supported the state grant program that provides free aid to students from low- and lower-middle-income Pennsylvania families by more than $1 billion.
