Credit Crisis May Make College Loans More Costly

Even at a highly ranked school such as Georgetown, some students are anxious about rising rates.

Andrew Helms, 24, a master's student in Arab studies at Georgetown, said he had to take out $50,000 in loans to cover the first of his two years of graduate studies. He still has undergraduate debt to pay off. His federal loan is fixed at a 6.3 percent interest rate, while his private loan rate has reached 7.8 percent. Any rise in the latter would be "a substantial concern," he said.

School debt "determines what you'll do after graduation," he said. "People who want to go into humanitarian work will have to wait until 10 to 15 years down the road until after you have paid off your loans. . . . I might have to sell my soul to an oil company."

In addition, Robert Shireman, president of the California-based Institute for College Access and Success, said too many students already take out expensive private loans for technical training programs that often don't lead to high-paying jobs. "Some of those loans are predatory loans that should not have been made," Shireman said.

The cost of college is a significant concern from living rooms to Capitol Hill as declining housing values and the economic slowdown force families to tighten their budgets. Debt levels of college graduates more than doubled to $19,200 over the past decade, according to the Institute for College Access and Success.

More students are turning to private loans, which are more costly because they lack a federal guarantee. With college costs rising faster than the maximum loan amount students are allowed under the federal program, the share of education loans that are private has quadrupled over the last decade, to 24 percent last year, according to the nonprofit College Board.

Most first-year college students can borrow a maximum of $3,500 through a federal Stafford loan, and the cap rises to $5,500 for the third year and beyond. Maximum loan amounts are higher for students who are not dependents and for graduate students. Other federal grants and loans also may be available.

Jevita de Freitas, director of student financial aid at George Mason University, said Virginia's budget has put some state higher-education funding in jeopardy, which could force more students to seek private loans. She added that the school has gone so far as to advise some students to lower their loan amounts by living with their parents.

"We do know that students are finding it much more difficult to get loans from the agencies that have served them in the past," said Alvin Thornton, associate provost at Howard University. "What's required of a student and a family to qualify for a loan is much more rigorous, much more demanding. We're talking about not wanting to lose any student because they can't pay their tuition."

The cost of making loans to students has gone up largely because lenders have struggled to find investors to buy this debt. Without the ability to securitize loans in this fashion, firms don't have the money to lend to students.

"Right now the securitization market for private loans is not there," said Tom Joyce, a spokesman for Sallie Mae. "And if you thought there was an asset class that would be okay, it would be federal loans that have a guarantee from the government. But even that market has gone from tremors to earthquakes."

But federal education officials and financial aid officers say students who want federally subsidized loans will ultimately be able to get them. The Department of Education is working to assure schools that federal loans will be available, said Larry Warder, the department's acting chief operating officer for federal student aid, noting that the lending picture is mixed. He added that while some lenders are raising fees, J.P. Morgan Chase recently announced that it is waiving fees and reducing rates on those loans.

"We're concerned, as everybody is, because there is turmoil in the financial markets, but so far we haven't found it in the student loan office," Warder said. "I'm afraid people are panicking with no reason to."

Lenders say a cut in congressional subsidies last year also hit them hard, though lawmakers such as Sen. Edward M. Kennedy (D-Mass.) said financial firms are overstating the impact. These subsidies had been meant to help firms and banks issue federally guaranteed loans at below market rates.

But Kennedy said the subsidy cuts are helping students, not hurting them. "The stress some lenders are experiencing is related to changes in the credit markets, not the reductions in lender subsidies passed in last year's student aid law," he said.

But Joyce, the Sallie Mae spokesman, said those reforms are having an unintended effect. "Congress enacted this legislation when credit markets were at their best. The subsidy cuts are clearly not designed for times like these."

Some borrowers are already feeling the squeeze from the tightening credit market. Rebecca Reynolds, 23, who graduated from Northern Illinois University in May, said the variable interest on her $15,000 debt has already hit 8.7 percent. Her monthly payments are at $183, which is difficult for a public interest worker.

"Working at a nonprofit, it's really hard to pay off your loans quickly," said Reynolds, who works at U.S. Public Interest Research Group. "My paycheck is not getting bigger, and if the whole economy is this way for a long time, . . . it's definitely something that hangs over your head."