Private loans scarce for students

Cutbacks by lenders could keep thousands out of college

A retreat by private-sector lenders from the market for education loans is threatening to keep thousands of students out of college in the coming academic year.

About 10 percent of the 9 million student borrowers in the United States seek such private loans, which supplement the limited amounts available from government-aid programs. Over the past decade, as government grants and loans have failed to keep pace with rising tuitions, private-loan borrowing has increased more than tenfold to $17.1 billion annually.

More than two dozen lenders, including Bank of America Corp. and Citigroup Inc., have stopped or curtailed private lending to students since the beginning of the last school year.

Last week, Wachovia Corp. joined their ranks. Ferris Morrison, a Wachovia spokeswoman, said the bank decided to stop making private loans to undergraduates after "evaluating our organization in the current environment."

Lenders have cut back on making such loans as investors have shunned the securities they rely upon to raise lending capital.

The nonprofit Massachusetts Educational Financing Authority, or MEFA, said late last month that it couldn't raise the capital for private loans, forcing some 32,000 would-be borrowers to scramble to find funds elsewhere. Earlier this year, the Michigan Higher Education Student Loan Authority, another nonprofit lender, stopped making certain private loans.

Some of the hardest-hit students are at for-profit schools that offer training in everything from nursing to computer programming. These schools often cater to low-income students who tend to have lower credit scores and higher loan-default rates.

After multiple rejections from lenders, Katrina Cardin, a single mother of two from Mount Horeb, Wis., recently landed a $3,000 loan to pay off her overdue nursing-school bills from the summer term. But she's still not sure how she will pay for fall classes at Southwest Wisconsin Technical College, in Fennimore, Wis. "I was approved for a loan with no problem last year," she says.

Most colleges say it's still too early to say how many students could fail to come up with the money to cover their costs. Bills for the first semester are typically due this month. Because the government shored up the federal student-loan program in May, which accounts for about four out of five student loans, educators don't believe the problems on the private lending side will lead to a collapse of the broader market. But for many students, the private-sector turmoil could lead to delays, disruptions and fewer choices on where to attend.

Students are being hit on another front: Many banks that are still making private loans are tightening their standards. Among other factors, lenders consider a loan applicant's so-called FICO score, a measure of creditworthiness used to rate consumers on a 300-to-850 point scale. Some student borrowers say that, in recent years, they have qualified for private loans with FICO scores in the 600-point range.

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