The Wall Street Journal-20080214-Lenders Predict Harsher Climate For Student Loans

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Lenders Predict Harsher Climate For Student Loans

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Amid a widespread tightening of credit, some student lenders predict college loans will be harder and more expensive to come by for the fall.

Without a break in the credit crunch -- such as stepped-up lending by major banks -- the situation could become far worse, these lenders say, leading to many students being unable to fund their educations.

"There is no question in my mind that, unless something changes in the marketplace, there will be a shortfall of funds available to make student loans," says Mark Valenti, president of the Connecticut Student Loan Foundation, a nonprofit lender based in Rock Hill, Conn. "I've been doing this since 1978, and I've never been more nervous."

The subprime-mortgage crisis has driven investors away from the asset-backed securities that are a crucial source of capital for many student lenders, prompting smaller concerns like College Loan Corp. and Nelnet Inc. to stop making certain kinds of loans. And in recent days, the market for auction-rate securities, a type of financing vehicle tied to student loans, has seized up.

Concerns were heightened Tuesday when the Michigan Higher Education Student Loan Authority, a state agency, said it would suspend a major student-loan program because it was unable to raise capital in the markets. "I think a lot of agencies like ours are going to be running out of money," says Tom Saxton, a deputy treasurer for the state of Michigan. "It just hasn't hit yet."

Indeed, college financial directors say they aren't yet seeing major problems with loan availability. One reason is that most students secured their loans for the current academic year before it began and won't begin borrowing again for the next one until late spring. "It's still early right now," says Doug McNutt, the University of Akron's financial-aid director.

Some observers are convinced that if lenders dependent on asset- backed securities leave the market, big banks with other sources of capital will step in and fill the void, especially for loans guaranteed by the federal government, which accounted for more than three-quarters of the $77 billion that students borrowed for the 2006- 07 academic year. "This is a very good business," says Sandy Baum, a policy analyst for the College Board, "and such a low-risk thing."

SLM Corp., the biggest student-loan company, is poised to secure a new $31 billion line of credit. Spokesman Tom Joyce says there's "no chance" current credit market conditions will damage its ability to make loans this year.

Even so, the company commonly known as Sallie Mae, struggling after years of stellar growth, has said it will tighten credit requirements for borrowers and emphasize making higher-interest private loans over those that are federally backed. Sallie Mae currently charges interest rates ranging from 5.5% to 13% on private loans, depending on borrowers' credit standing.

Mr. Joyce adds that because Congress last year slashed the subsidies made to lenders of federal loans, Sallie Mae and others will have to scale back benefits they had previously offered to students, such as breaks on fees and discounts for on-time payments. "Unfortunately, there will be higher prices in the marketplace," he says.

The subsidy cuts, Sallie Mae's problems and the subprime-lending fallout have created "a perfect storm for the student lending industry," says Terry Hartle, vice president for government affairs at the American Council on Education, a college association in Washington. Mr. Hartle says he's "concerned but not scared" about loan availability because the number of lenders has grown so much in recent years that "you could lose some without there being a shortage of capital."

Mark Kantrowitz, who operates FinAid.org, a Web site focused on college finance, says students will have fewer lender choices this fall, while the interest rates for private loans are likely to rise by one percentage point, with related fees rising by an equal amount. For the moment, he doesn't envision a loan shortage, "but there is also the possibility that there may be more turmoil," he adds.

Industry observers say they don't know of any other state authorities poised to immediately suspend loan programs, but uncertainty in the credit markets has many nonprofit lenders weighing their options.

Brazos Higher Education Service Corp., which has a $15 billion student-loan portfolio, was one of the lenders whose auctions failed this week. Company executives have been working on related problems since the fall, when the market for auction-rate securities first ran into trouble, says Ellis Tredway, executive vice president. Nothing is clear yet, he says, adding that with the summer borrowing boom coming up, lenders like Brazos, based in Waco, Texas, are anxious.

"It is not hard to look down the road and ask whether there may be a funding crisis for student loans this fall," he says.

The Vermont Student Assistance Corp., a nonprofit public agency that originates and guarantees student loans, says it has funds to keep making loans for the next few months but needs to raise $200 million in June and July for the next school year. In the meantime, a failed auction this week means it will have to pay higher interest rates on $300 million in bonds it has already used for student loans.

Don Vickers, the agency's president and chief executive, says if the credit crisis isn't resolved by summer, agencies like his may not be able to afford to keep funding students' college tuitions. "If it's not resolved by then," he says, "it's going to be catastrophic."

With students poised to begin receiving financial-aid award letters in the next month or so, FinAid's Mr. Kantrowitz advises that students should, as always, carefully focus on how much of the offer is in grants that don't have to be repaid and how much is in loans that do.

Students should pursue as much federal and state loan money as possible before considering private loans, which tend to have higher and variable interest rates. If other state authorities discontinue loan programs, private loans may be the only option, but students can lower the interest rates they are charged by having a parent cosign.

Martha Holler, a Sallie Mae official, recommends that students get in touch with financial-aid offices quickly to work out their loan plans. Students tend to get financial-aid award letters in the next month or so but many wait until the summer to decide on loans. Ms. Holler says that students needing private loans should act promptly since credit standards are tightening. "Apply now instead of waiting," she says.

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Liz Rappaport contributed to this article.