Credit squeeze hits college students, families

John W. Schoen Senior producer • Profile • E-mail

Paying for a college education — with a price tag now north of $50,000 a year at some top-priced private schools — has never been easy.

But this year, on top of the complexities of multiple public and private lending programs and hit to college savings accounts from the turmoil in the financial markets, parents and students have another obstacle to overcome. The ongoing credit crunch has prompted dozens of private lenders to stop making student loans.

Money is still available from government-sponsored, direct lending programs. But parents applying for student loans from private lenders are finding money is much tougher to get.

“I’ve been hearing from lots of families that are asking: 'How can I find a loan?' Because they’ve been applying to three lenders and they’ve been rejected from all three," said Mark Kantrowitz, publisher and founder of FinAid.org, a Web site that offers information about student loans.

“Many of the lenders that students may have used last year are no longer in the business,” he said. “And your lender may be leaving and give you no notice.”

Trouble has been brewing since the subprime mortgage mess threw the global credit market into disarray last summer. Then, in response to complaints about colleges accepting payment to steer families to “preferred” lenders, Congress cut subsidies to private lenders, making these loans less profitable. Now, with the credit markets still tight, many private lenders have retreated from the student loan market altogether.

Sorting through the maze of student loan programs is daunting in the best of times. Both Stafford loans, which are available to students, and PLUS loans, which are offered to parents, are available directly from the federal government or through private lenders. Historically, those private lenders have offered more choices in the loan terms — everything from the interest rate charged to the repayment period.

But, with private lenders leaving the market, those choices have been severely curtailed. And those lenders that remain are getting choosier about who they lend to, according to Mary McGrath, a financial planner with Cozad Asset Management in Champaign, Ill.

“They’re tightening the criteria to get the very best rates and then they’re punishing you even more so when you can’t get those,” she said “They want a very good credit history, so if you don’t have that your best option is to anyone who can cosign for you so you can get a better rate.

Of the 100 largest private lenders, some 27 representing more than 12 percent of last year’s Stafford and Plus loan programs have left the market, according to Kantrowitz. For consolidation loans — which students use to wrap up multiple debts after they graduate — the retreat has been wider: 41 of the 100 biggest lenders, representing 85 percent last year consolidation loan volume, are not longer in the student loan market.

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