Student lending faces a crisis

As the financial world waits for frozen credit markets to thaw, higher-education officials say college students will face unprecedented scrutiny from private lenders as the United States reels from its sharp economic downturn.

Students seeking to attend the nation’s largest universities whose loan applications come with credit-worthy cosigners likely will have little trouble obtaining financing, experts say–but community college students with scant or checkered credit histories might be driven to nontraditional payment policies.

The $850 billion bailout package passed by Congress earlier this month won’t have an immediate impact on student loans, but it could be a first step in unclogging the credit market and making loans more widely available, campus officials said. Until then, many college students will have to rely on federal money flowing directly from the federal government.

"I just hope, for students’ sake, that this bailout helps and access doesn’t become an issue for students to be able to … fulfill whatever dream they have," said Tom Dalton, assistant vice president for enrollment management at Excelsior College in Albany, N.Y.

If loans become scarce, colleges might have to establish pay-over-time systems, in which students have an entire semester to pay for classes. Because that requires colleges to absorb the risk, instead of a third-party lender, some financial experts say many institutions would be reluctant to embrace such a model.

Students entering college will find their lending options have dwindled in just the past year. Thirty-six lenders have stopped offering private student loans since 2007, according to, a web site that tracks student lending, scholarships, and other kinds of financial aid. And with world markets in an upheaval, the line extending from the student loan industry soon could be a long one.

"I’ve never seen anything like this is 25 years in higher education, and I don’t think anyone else has either," said Excelsior College President John Ebersole, adding that an unusually high number of Excelsior students waited until tuition deadlines to pay for their fall classes. "We’re living in a very unique and unpleasant time in our history."

Ebersole and other college officials said federal financial aid would largely be immune to the disruptions in the credit markets. He said direct federal lending has become commonplace at many community colleges and soon could catch on at four-year universities. The trend took off after major banks announced they would stop lending to students at traditionally riskier two-year colleges. Congress calmed fears in higher education in September, when it voted to ensure that federal loans would be available until at least the end of the 2009-10 school year.

Over the past year, major universities such as Indiana, Penn State, and Michigan State have announced they will use the federal Direct Loan Program as the source for federally backed student loans. At Indiana’s Bloomington campus, nearly 40 percent of undergraduates–or about 12,000 students–use subsidized federal loans through private lenders. Nationally, 40 percent of students who receive student aid pay for college through federal loans, according to a 2007 study released by The College Board. Sixty-one percent of graduate students who use financial aid receive federal loans. 

In a survey conducted in April by Student Lending Analytics, an organization that provides data for colleges’ financial aid offices, officials at 7 percent of two-year colleges said they were planning to switch to direct federal lending, while 28 percent said they were considering the move. Overall, 5.8 percent of college officials in the survey said they were committed to the direct lending program.

Roger Thomas, vice provost for enrollment management at Indiana University, said officials would consider returning to private loans, but not while financial markets were in flux.

"Competition among lenders in the private sector served our students well for several years," Thompson said in a statement released last spring. "However, at the present time there is just too much uncertainty and turmoil in that market to make the risk worth taking."

At Penn State, the commitment to direct federal funding will provide more security for the 44,000 students who receive federal assistance for school. Relying on the U.S. Treasury instead of banks that are susceptible to collapse has become a sound short-term strategy, Penn State officials said.

"Removing the uncertainty for our students and letting them know their loans will be funded is an assurance we need to provide," said Anna Griswold, the university’s assistant vice president and executive director of student aid.

Dalton at Excelsior College said migration to direct lending could be costly for large universities, which might be forced to create a new department to manage direct lending on campus.

"It’s not easy to do that as money gets tighter and tighter," said Dalton, who has worked in the financial aid industry for 27 years.

While campus decision makers and students seek alternatives to private funding, officials from one of the country’s largest student lenders, Sallie Mae, said they were confident that access to higher education wouldn’t be impeded by rollercoaster credit markets.

"The bottom line in student loans is this: Despite the pinch of the current credit crisis, federal student loans are available to students and parents regardless of financial need, income, or collateral," said Martha Holler, a Sallie Mae spokeswoman. "While some lenders have stopped offering these loans or become more school-selective, Sallie Mae continues to fund every eligible federal student loan application received from every student at every school."

Holler said Sallie Mae–which manages $172 billion in student loans and serves 10 million students nationwide–will join other lenders in benefiting from the economic bailout bill passed by Congress and signed by President Bush this month.

"We do not anticipate selling any assets to the government through the rescue program," she said. "We and other student loan providers will benefit indirectly from the program as other banks and financial institutions sell their troubled assets and subsequently resume lending in the capital markets."

Ebersole said there could be one bright spot in the gloomy economic outlook. During economic lulls, corporations often eliminate training sessions, leaving colleges as the logical alternative for professionals looking to propel themselves up the corporate ladder.

"When people are worried about their jobs, they typically try to bulk up on credentials," he said. "That’s why there’s a belief that when the economy goes in the tank, we’re OK."

Despite the economic strain, higher education has seen an increase in enrollment this academic year. Enrollment at large universities has grown slightly this fall and community colleges have seen an influx of students since the summer, as students seek career-boosting degrees without the high costs of prestigious universities, according to several national reports and studies.

From 2000-2006, two-year community colleges saw a 10-percent annual increase in enrollment, according to the U.S. Department of Education. Early community college estimates show that 10-percent bump might be higher this year.

Eric D. Fingerhut, chancellor of the Ohio Board of Regents, said workers who lose their jobs in economic slumps turn to colleges to improve their prospects. This trend, he said, should keep college enrollment steady in the coming years.

"I think we will see more students, both those seeking professional training and those that have lost their jobs," said Fingerhut, adding that colleges could survive the financial crisis by closely monitoring endowments and student loans. "In the long run, having the additional credentials will lead to better careers and better jobs for people."

The wave of Americans seeking on-campus training during this financial downturn could have consequences.

White House officials warned Congress in September that the ever-increasing dependency on direct federal student loans could lead to a shortfall of the country’s most vital student aid program, Pell Grants. The $14 billion grant program could fall $6 billion short next year as applications pour in at an unprecedented pace. More than six million low-income college students reportedly will receive Pell-Grant funds this year.

Ebersole and other higher-education decision makers said a "pay-over-time" financing model could leave campuses short on projected earnings at the end of each semester. Taking on financial risk isn’t the most attractive option, Ebersole said, but at Excelsior–where the college allows students to pay throughout a semester–the default rate is less than 5 percent.

"But if someone can take a course and at the end of four months, you don’t have your money, you have no further leverage with them," he said. "It’s a tough situation."


Excelsior College

Sallie Mae

Indiana University

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