SHARE

The Credit Crunch Takes a Toll

January 23, 2008

For months, college officials have been nervously eyeing the tumult of the subprime mortgage crisis, the aftermath of the student loan scandal, signs of a coming recession, and other financial indicators, and wondering if, or when, the gathering winds would hit higher education. Tuesday, the first big wave did -- blasting only the for-profit sector, for now, but worrying others.

Several leading companies that provide higher education announced that they had been told by Sallie Mae and other lenders that they would severely restrict or cut back entirely on student loans to their students. In separate announcements:

  • Corinthian Colleges said that Sallie Mae, which provides 90 percent of the private loans taken out by its students, would no longer make loans to students with poor credit scores (who represent about 75 percent of Corinthian students who receive private loans, the company acknowledged). Corinthian also said that College Loan Corp. had told the company that it would stop making all private and federal loans to the for-profit higher education sector, and that another lender, Student Loan Express, would no longer make private loans, but will continue to make federal loans to for-profit colleges.
  • Career Education Corp. made a similar announcement, saying that Sallie Mae had decided to end a two-year agreement to provide the college company's students with "recourse loans," also known as "opportunity loans" -- loans provided by some lenders to students with lower credit scores who might not otherwise qualify for loans. Career Education said it would search for alternatives to such loans but might end them altogether.
  • ITT Educational Services issued an upbeat statement (headline: "ITT Educational Services, Inc. Announces Availability of Additional Student Loan Options") saying that three lenders -- Bank of America, Chase Education Finance and Citibank's Student Loan Corporation -- had agreed to provide federal and private loans to its students through 2008-9. ITT's statement neglected to mention, however, that those lenders would be replacing Sallie Mae, which is pulling the plug on some of its loans to ITT, too.

Sallie Mae is expected to announce its fourth quarter and year-end results in a news conference today, and is likely to say at that time exactly how far back it is cutting its student loan business. The company had said in a filing this month that it would be "more selective" in making federal and private loans, but until the for-profit companies began making their announcements Tuesday, it was not clear exactly what that meant.

Tuesday's various announcements confirmed the sense of most observers that the impact of the credit crunch and the larger economic instability in the country would be felt most directly in the student loan market place. The crisis in the subprime mortgage industry -- which has been a major drag on the U.S. economy over all -- has an analog of sorts in the student loan market, and several lenders, including First Marblehead and Sallie Mae, have found themselves unable to find investors willing to buy their portfolios of riskier loans.

That fact, combined with cuts that Congress made in federal subsidies to lenders last fall that diminished the profitability of federal loans, has combined to put some lenders on much shakier ground, and they are responding by cutting back on their riskier loans -- often those to students from lower income backgrounds who attend higher-cost institutions, and those with poor credit scores.

"The whole student loan 'scandal' has stopped the lenders from cross-subsidizing loans to some extent," said Harris Miller, president of the Career College Association, which represents for-profit and career-oriented colleges. "Who suffers in all that? Not the middle class students, by and large; they will get loans somehow. Mommy and daddy will co-sign. The people who aren't going to do well are the kids, and often adults, who have poor credit scores, who need gap funding beyond what's available through Pell Grants, Stafford loans, state grants."

Miller said he hoped that members of Congress, college officials and others might come together to "do something before what's a problem now becomes a crisis" -- "before kids and adults find their access to education cut off." He said the lenders' recent announcements are signs that Congress may have gone too far in cutting the subsidies to loan providers last summer, and that the context has changed since then, with the economy "going in the tank" and the subprime mortgage crisis having exploded, making the financial markets generally skittish.

Many student aid experts, though, argue that lenders had gone too far in making costly private loans to students who should not have received them, because they did not have the financial wherewithal to manage significant levels of debt at high interest rates. Given the skepticism with which some officials in traditional higher education view the for-profit sector, the view that the credit crunch is a major crisis for colleges may not take hold unless and until some nonprofit colleges are at risk -- and that may not be far off, some fear.

The next sector that could see its students face limits on what they can borrow are some small, private colleges that educate significant numbers of low-income and first-generation students. Officials at the National Association of Independent Colleges and Universities said they have been hearing fretting from administrators at some member colleges, and that they are trying to gauge the potential impact of the credit crunch on their institutions.

In addition to diminished availability of private loans for some needy students, the institutions could also be pinched if providers of credit insurance for municipal and other bonds significantly ratchet up their premiums to make up for the fact that their own credit ratings have been damaged by the credit crunch, said Matthew Hamill, senior vice president for advocacy and issue analysis at the National Association of College and University Business Officers.

Similarly, all colleges could see their financial situations affected if, as is beginning to be the case, the skittishness in the credit markets drags down the stock markets (and colleges' endowments with them), and ultimately public colleges will see a downturn in state support if the economic goes into a full recession.

Tuesday brought the first major ripples of the credit crunch into higher education; college leaders can only hope it doesn't grow into a tsunami.

 

Most:

  • Viewed
  • Commented
  • Past:
  • Day
  • Week
  • Month
  • Year
Loading results...
Back to Top