Some student-loan firms leaving program

Lending is becoming increasingly unprofitable

Several student-loan lenders are backing out of the federal program, the result of the credit crunch and government subsidy cuts that have made the business of lending to students increasingly unprofitable.

Big banks, such as Citigroup Inc. and Wells Fargo & Co., might be reluctant to pick up the slack as other lenders exit because they are already stretched by the credit crisis. The government, already a big student lender, could step in to shore up the system, although that would be complicated.

On Monday, Brazos Higher Education Service Corp. became the latest lender to suspend new loans to students through the Federal Family Education Loans program, or FFEL, for the 2008-09 academic year. Brazos, a 33-year-old company based in Waco, Texas, is one of the nation's largest student lenders, with a portfolio of $15 billion in education loans. It joins a list of at least 26 other lenders that have stopped providing such loans, according to FinAid.org, a student-financial-aid publication.

An estimated 8 million students and parents will seek $109 billion through FFEL for the coming fiscal year, according to Education Department data. If lending continues to tighten, it could push up their costs.

"We've seen a dramatic reduction in borrowers' opportunities," says Deborah Fox, founder of Fox College Funding LLC, a San Diego company that advises families on paying for college.

The void that the lenders leave already accounts for almost 10 percent of the total estimated loans needed this year, according to one industry estimate.

"I think you will see a larger number of lenders exiting this market," said Sameer Gokhale, an analyst with Keefe, Bruyette & Woods. "They are not making money on these loans."

Samara Yudof, a spokeswoman for the Education Department, wrote in a release that U.S. officials "are concerned about the uncertainty in the current market and are weighing all options available" to ensure federal student aid continues to be available.

Department officials maintain that with nearly 2,000 lenders taking part in the FFEL program, others, particularly banks, will pick up the volume from institutions that stop lending. The vast majority of those lenders are relatively small players in the student-loan arena.

The top 50 FFEL lenders account for more than 83 percent of all loans made under the program, according to FinAid.org. Three banks that rank in the top 50 exited FFEL last week.

SLM Corp., commonly known as Sallie Mae, is the biggest lender in the industry. Banks comprise more than 40 percent of student-loan originations.

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