August 11, 2008
PAGE ONE
Students Face Hit
As Private Lending Dries Up
By ROBERT TOMSHO
August 11, 2008; Page A1
A retreat by private-sector lenders from the market for education loans
is threatening to keep thousands of students out of college in the
coming academic year.
About 10% of the nine million student borrowers in the U.S. seek such
private loans, which supplement the limited amounts available from
government-aid programs. Over the past decade, as government grants and
loans have failed to keep pace with rising tuitions, private-loan
borrowing has increased more than tenfold to $17.1 billion annually.
More than two dozen lenders, including Bank of America Corp. and
Citigroup Inc., have stopped or curtailed private lending to students
since the beginning of the last school year. On Tuesday, Wachovia Corp.
joined their ranks. Ferris Morrison, a Wachovia spokeswoman, said the
bank decided to stop making private loans to undergraduates after
"evaluating our organization in the current environment." Lenders have
cut back on making such loans as investors have shunned the securities
they rely upon to raise lending capital.
[chart]
The nonprofit Massachusetts Educational Financing Authority, or MEFA,
said late last month that it couldn't raise the capital for private
loans, forcing some 32,000 would-be borrowers to scramble to find funds
elsewhere. Earlier this year, the Michigan Higher Education Student Loan
Authority, another nonprofit lender, stopped making certain private loans.
Some of the hardest-hit students are at for-profit schools that offer
training in everything from nursing to computer programming. These
schools often cater to low-income students who tend to have lower credit
scores and higher loan-default rates.
After multiple rejections from lenders, Katrina Cardin, a single mother
of two from Mount Horeb, Wisc., recently landed a $3,000 loan to pay off
her overdue nursing-school bills from the summer term. But she's still
not sure how she will pay for fall classes at Southwest Wisconsin
Technical College, in Fennimore, Wisc. "I was approved for a loan with
no problem last year," she says.
Most colleges say it's still too early to say how many students could
fail to come up with the money to cover their costs. Bills for the first
semester are typically due this month. Because the government shored up
the federal student-loan program in May, which accounts for about four
out of five student loans, educators don't believe the problems on the
private lending side will lead to a collapse of the broader market. But
for many students, the private-sector turmoil could lead to delays,
disruptions and fewer choices on where to attend.
Tighter Standards
Students are being hit on another front: Many banks that are still
making private loans are tightening their standards. Among other
factors, lenders consider a loan applicant's so-called FICO score, a
measure of creditworthiness used to rate consumers on a 300-to-850 point
scale. Some student borrowers say that, in recent years, they have
qualified for private loans with FICO scores in the 600-point range.
This year, some lenders have raised that threshold by as much as 100
points, according to financial-aid administrators and industry analysts.
The hike is especially troubling for younger college students who
haven't had a chance to build up a good credit score.
This could leave as many as 200,000 students ineligible for private
loans this fall, says Mark Kantrowitz, publisher of Finaid.org, a Web
site devoted to financial aid. Mr. Kantrowitz came to this estimate by
using publicly available information to track securities backed by
student loans. He then counted the number of those borrowers with credit
scores that don't meet the tougher standards. With only a few weeks
before classes begin, "students are definitely having more trouble
finding the lenders," says Mr. Kantrowitz, who has testified before
Congress on aid issues.
Education for All
Easier access to student loans has helped advance the American dream of
college education for all. More than two-thirds of high-school graduates
went right to college in 2006, up from fewer than half in 1980,
according to the Department of Education's latest tally. Another recent
federal report indicated that 44% of all adults were taking classes of
some kind, up from 33% in 1991. But that trend, like the notion that
everyone should own their own home, is under pressure now.
With policymakers and corporate leaders saying post-secondary education
is pivotal to maintaining a competitive work force, the lending squeeze
could spawn election-year pressure for the government to intervene in
the same way it has with the troubled housing market.
Credit rater Standard & Poor's last month warned that problems with
private student loans could be widespread this year, causing some
students to drop out of college. Its report added that if the economic
downturn leads more students and families to default on their loans, the
availability of such funds may dwindle further. "We think it could
affect not just poor-credit-risk borrowers but the middle class and the
upper middle class," says credit analyst Mary Peloquin-Dodd, a co-author
of the report.
Keiser University, based in Fort Lauderdale, Fla., with 13,000 students
on 13 campuses, says only about 25% of its applicants are getting
approved for private loans these days, down from about 80% a year ago.
"And from what I can see, it's going to get worse, not better," says
founder Arthur Keiser, whose school has begun making loans on its own.
More than 50 students a year used to be approved for private loans at
the International Academy, a cosmetology school in Daytona Beach, Fla.
So far this year, administrators say there have only been three, and the
recipients face interest rates as high as 23%, more than double the
typical rates of a year ago. As a result, the school, which charges
$15,600 in tuition for its cosmetology program, says it expects some
won't be able to enroll.
Those turned down for loans include Patricia Bannister, a 22-year-old
who hoped to become a hairdresser and use the income to eventually
pursue a teaching degree. School officials say Ms. Bannister fits the
credit profile of loan applicants who have been approved in the past,
but this year she was rejected by three lenders with little explanation.
"People are constantly telling you to go to school and, all of a sudden,
when you try to get in you can't get anywhere," says Ms. Bannister, who
now works as a program director at a karate school and has put off plans
to go to school.
A Financial Lifeline
Critics of private education lending, including student-advocacy groups,
say these loans typically have higher interest rates and fewer consumer
protections than government loans, and that many borrowers would be
better off seeking a cheaper education than resorting to them.
Even so, they have become a financial lifeline for many students.
Antonio Flores, president of the Hispanic Association of Colleges and
Universities, an industry group that represents schools serving Hispanic
students, says that if access to private loans is cut off, schools and
families would expect Washington to "do something to insure that private
lenders are stimulated to do what is right and provide loans to the
students who need them."
Students and their families often turn to private loans when they have
borrowed as much as they can under lower-cost federal programs.
Theoretically, after a student has used up the federal maximum --
usually $7,500 a year for students at the undergraduate level -- parents
can borrow all that their child needs to pay for college via a federal
"Plus" loan, but the parents must be deemed creditworthy. Needy students
with parents unwilling or unqualified to borrow have few alternatives
other than private lenders.
Getting By
Amorelle Henry, 25, has two semesters left to go of nursing school at
the University of Northern Colorado in Greeley, Colo. She borrowed about
$15,000 in private loans from various lenders in each of the past two
years to supplement federal grants and loans and cover her living
expenses. This year, her lenders rejected her loan applications, citing
her FICO score, which, at 626, is unchanged from last year, she says.
She says that her parents are dealing with financial setbacks of their
own and haven't qualified for federal Plus loans in the past.
Ms. Henry says she will try to get through the fall semester by working
24 hours a week as a nurse's assistant while also dealing with a full
load of classes and clinical assignments. But she worries she won't be
able to maintain her B average and handle the job during the spring
semester, when she is required to complete an unpaid, 40-hour-a-week
internship. "I'm scared half to death," Ms. Henry says.
In May, the securities markets that lenders use to raise capital for
students loans -- both federal and private -- seized up. The Bush
administration announced a plan to avert problems with the federally
guaranteed loans made by private-sector lenders. Using authority granted
earlier this year by Congress, the government plans to buy and invest in
such loans, freeing up capital so lenders can make new ones. But that
didn't provide any new money for private lending.
Some industry observers say that families may be able to cobble together
the funds to pay for the fall, but then run into trouble later in the
year. Their concern is that lenders may grow even more selective, and
some parents could face job losses and see a decline in the home-equity
lines that many have tapped for college costs. "The second semester
could really be a problem," says Maureen Budetti, director of
student-aid policy for the National Association of Independent Colleges
and Universities.
Write to Robert Tomsho at rob.tomsho@wsj.com1
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