Student lenders dropping federally backed loans

WASHINGTON — Lenders are dropping out of the federally backed student loan business in droves, fleeing an environment squeezed of cash because of the credit crunch.

The call for government action is getting louder, just as the pile of loan applications gets higher on the desks and kitchen tables of students headed to college next year.

Forty-six student lenders have stopped making federally guaranteed student loans, either temporarily or permanently.

Distress in the $330 billion market for auction-rate securities in recent months has rippled into the student loan market, and several states have suspended their college loan programs. The 46 lenders accounted for 12 percent of the federally backed student loan market, according to FinAid.org, a Web site focused on student lending.

Companies including Washington Mutual Inc., Sovereign Bancorp Inc., College Loan Corp., CIT Group Inc., NorthStar Education Finance Inc., HSBC Bank USA and Zions Bancorp have stopped issuing federally guaranteed student loans in recent weeks. And state agencies in Iowa, Michigan, Montana and Pennsylvania have suspended college loan programs.

The major federal student loan program is providing an estimated $50 billion in loans to 6.4 million students in the current academic year.

Against the backdrop of the housing and financial market turmoil and the $30 billion federal rescue of stricken investment bank Bear Stearns Cos., politicians are making the case that access to education, like homeownership, is a vital social goal that deserves protection.

"There is a growing concern in Congress," said Sarah Flanagan, vice president of government relations at the National Association of Independent Colleges and Universities. "We don't know if we're over the hump, or if this is going to be a crisis."

This week, Rep. Paul Kanjorski, D-Pa., proposed legislation designed to pump money temporarily into the student loan market.

Kanjorksi's bill would permit the 12 regional banks that make up the Federal Home Loan Bank system to invest their surplus funds in securities backed by student loans and to accept such securities as collateral. The banks also would be able to make money available to the banks and thrifts in their regions for student loans.