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Sallie Mae To Charge For Loans To Students

By David Cho
Washington Post Staff Writer
Saturday, April 12, 2008

Sallie Mae, the country's largest student lender, announced yesterday that it will start charging students who apply for federally backed loans and cut the type of loans available, citing the turmoil in the credit markets as a reason for this shift.

The Reston company said in a letter to schools and universities that it would immediately stop offering loans that consolidate debt accumulated by undergraduate and graduate students.

This has traditionally represented a major part of Sallie Mae's business. The firm said it would instead concentrate solely on lending to current students.

Starting next month, Sallie Mae will charge fees -- ranging from $35 for freshmen to a few hundred dollars for graduate students -- to apply for federal loans. These fees had largely been covered by lenders in the past, but most firms are now dropping this benefit.

Citing "severe credit market deterioration" and a decision by Congress last year to cut subsidies to lenders, Sallie Mae President C.E. Andrews and Executive Vice President Barry S. Feierstein said that one-third of the top 100 student lenders have left the business. He warned that this means "loan demand will significantly exceed lender supply for the upcoming academic year."

The trend is worrying some lawmakers and top federal education officials who are preparing emergency programs to enable the government to make up the shortfall in student loans for the coming school year.

Some education advocates remain skeptical of Sallie Mae and other lenders, accusing them of using the disruption in the credit markets to push for a restoration of the subsidies that were cut last year.

"Clearly the loan industry has a long history of stretching the truth and the law to maximize their own profits," said Luke Swarthout, higher-education advocate for the U.S. Public Interest Research Group. "Of course they are being opportunistic about this."

But Mark Kantrowitz, publisher of FinAid, a Web site that provides financial advice for students, said the exodus from the industry is an alarming trend and may lead to higher borrowing costs for students.

Sallie Mae dropping out of the student-loan consolidation business is "fairly significant," Kantrowitz said. "It shows the student-loan system is under extreme stress when you have the largest student lender stopping the largest federal loan program."

Sallie Mae said in the letter that lenders who make federally backed loans would only be able to meet student demand once their traditional sources of money in the credit markets begin functioning normally again.

In addition to federally backed loans, private loans have also offered students a major source of financing for college. Students will now face higher rates for private loans, which they often need to cover tuition costs because there is a cap on the amount they can borrow in federally guaranteed loans. A small percentage of students who have bad credit or attend for-profit colleges with low graduation rates may be denied loans altogether, analysts say.

For lenders making federally backed loans, the $50.4 billion consolidation business has deteriorated the most. In a consolidation, students combine their various federal loans into a single package and lock in a single rate after they graduate.

Lenders making up two-thirds of this market have exited in the past few months, according to FinAid. Government officials have said that they will be able to fill the gap by offering consolidation loans themselves.

Last year, Congress cut the subsidies it paid to lenders offering federally guaranteed loans and used that money to lower rates from 6.8 percent to 6.0 percent for financially needy students. This group borrowed $27.5 billion last year. The rates on all other types of federally backed non-consolidation loans, which totaled $36.8 billion, were left the same and range from 6.8 percent to 8.5 percent.

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