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.
This year, some lenders have raised that threshold by as much as 100 points, according to financial-aid administrators and industry analysts. The hike is especially troubling for younger college students who haven't had a chance to build up a good credit score.
This could leave as many as 200,000 students ineligible for private loans this fall, says Mark Kantrowitz, publisher of Finaid.org, a Web site devoted to financial aid. Kantrowitz came to this estimate by using publicly available information to track securities backed by student loans. He then counted the number of those borrowers with credit scores that don't meet the tougher standards.
With only a few weeks before classes begin, "students are definitely having more trouble finding the lenders," says Kantrowitz, who has testified before Congress on aid issues.
Easier access to student loans has helped advance the American dream of college education for all. More than two-thirds of high-school graduates went right to college in 2006, up from fewer than half in 1980, according to the Department of Education's latest tally. Another recent federal report indicated that 44 percent of all adults were taking classes of some kind, up from 33 percent in 1991. But that trend, like the notion that everyone should own their own home, is under pressure now.
Credit rater Standard & Poor's last month warned that problems with private student loans could be widespread this year, causing some students to drop out of college. Its report added that if the economic downturn leads more students and families to default on their loans, the availability of such funds may dwindle further.