Credit Crisis May Make College Loans More Costly

By David Cho and Maria Glod
Washington Post Staff Writers
Monday, March 3, 2008

Many college students across the nation will begin to see higher costs for loans this spring, while others will be turned away by banks altogether as the credit crisis roiling the U.S. economy spreads into yet another sector, student lenders and Wall Street firms say.

Students seeking federally guaranteed loans, which are popular because they offer fixed, below-market rates, could be required to pay higher fees to borrow money, according to university finance directors and lenders.

An even greater burden may fall on those taking out private loans, which have become increasingly common as students look for new sources to finance the soaring costs of college. These loans often have variable rates, and they are projected to jump this year.

And at community and for-profit colleges, some students may be denied private loans entirely because the financial industry considers them riskier investments than their peers at other educational institutions.

"It's a little bit of a crunch. The money will be there; it's just going to be more expensive," said Yvonne Hubbard, director of student financial services at the University of Virginia. "The federally guaranteed loan program is always going to be available . . . but the good deals are harder to find. On the private side, loans are getting more and more expensive."

Many lenders are scaling back their activities because of turmoil in the credit markets, initially caused by the subprime-mortgage meltdown last year, and cuts in federal subsidies, firms said. Others have moved out of the business.

Last week, the Pennsylvania Higher Education Assistance Agency, one of the nation's largest student loan organizations, announced that it will temporarily stop making federally guaranteed loans this month. The College Loan Corp., the nation's eighth-largest student lender, also is leaving the federal loan program.

At least a dozen firms have stopped issuing private loans, citing problems in the debt markets. Sallie Mae, the largest student loan provider in the country, said it is tightening credit requirements for borrowers and pulling out of offering loans to students attending some for-profit career schools and community colleges.

The growing exodus has some college administrators worried. Georgetown University, for one, has devised an emergency plan to become a direct lender, like hundreds of other colleges and universities, in case more firms close shop. Other colleges are calling lenders to see whether they'll be in business next school year.

Members of Congress last week asked for assurances from the Bush administration that the federal program providing loan money directly to colleges will be able to handle increased demand. They also asked the Department of Education to gear up its "lender of last resort" program, which provides a safety net should many student loan firms fail.

If firms decide to stop lending late in the summer, "there will be a lot of people scrambling to find another lender in the fall," said Guy Gibbs, interim director of financial aid at Northern Virginia Community College, the largest higher education institution in the region, with 40,000 students.

The student loan troubles are being felt unevenly. Those attending institutions with high graduation rates and low default rates among their alumni may still be able to get low-cost private loans. Students at lower-ranked schools with higher defaults among graduates are likely to get hit with stiffer fees and rates.

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