Students facing tuition alone

By ROBERT TOMSHO | The Wall Street Journal
Published: August 11, 2008

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 percent 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.

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.

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.

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 percent of all adults were taking classes of some kind, up from 33 percent 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 percent of its applicants are getting approved for private loans these days, down from about 80 percent 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 percent, 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.

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.

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.