College students in need of private loans to pay for the coming academic year will have to grapple with higher interest rates and tougher credit checks. Even then, some who have qualified for such loans in the past probably won't this year.
"Private loans are going to clearly be harder to come by for many students," says Sandy Baum, senior policy analyst for the College Board, the nonprofit entity that administers the SAT admissions test. That's bad news at a time when grants and loans available under government aid programs have failed to keep up with rising college costs. Many students have had to rely on variable-rate private loans to fill the gap. Tighter terms for private loans will most affect students with low credit ratings and those who attend colleges with low graduation rates.
Private loans have been one of the fastest-growing ways to pay for college. In 2006-07, students and their parents took out an estimated $17.1 billion in private loans, up from $1.57 billion in 1996-1997, according to the most recent tally from the College Board. The $17.1 billion represents 22% of all the borrowing to pay for college that year.Concerns over private loans come as the federal government is trying to make sure federally guaranteed loans in its Stafford and PLUS programs will be readily available in the fall. A growing number of banks and other lenders have said they will stop making such loans because they have become unprofitable amid cuts in federal subsidies and troubles in the credit market. In response, some congressional leaders and advocacy groups are pushing for broader use of the government's direct-lending program, wherein students borrow from the government through their schools.
Private college lending faces a number of obstacles. Lenders and other institutions in the student-loan field are struggling to raise the capital to finance their activities amid a broader credit crunch. The latest to run into trouble is the Education Resources Institute Inc., or TERI, the nation's largest insurer of private student loans, which filed for bankruptcy court protection on Monday.
TERI insured more than $17 billion in privately issued student loans against default for First Marblehead Corp., a Boston-based company that acquired such loans from Bank of America Corp., J.P. Morgan Chase & Co., and other lenders. First Marblehead then bundled those loans into trusts that issued notes to investors. TERI relied on the bundling deals for its revenue, which has dried up as borrowers have been skeptical of securitizations of all kinds. So far, First Marblehead hasn't announced plans to end or curtail student loans. The company has said it's looking at "self-guaranteed loan products and products guaranteed by another third party."
Bond insurers that guarantee securities backed by packages of student loans have also run into trouble. But industry observers say that few large private lenders actually insure the loans themselves, the way TERI does. Most large private lenders simply bear the risk of the loans.
Asked about the impact of TERI's troubles, Thomas Kelly, a spokesman for J.P. Morgan Chase, said his bank has been reducing its business with First Marblehead and will continue to make private student loans using its own systems. "The lack of a secondary market is not an issue to us because we have a balance sheet we can put them on," he said. A spokeswoman for Bank of America, another First Marblehead customer, said TERI's bankruptcy filing would have "no impacts on the vast majority of our college loan customers."
TERI officials have said they hope they have sufficient reserves to cover defaults. If that isn't the case, it could have a negative psychological impact on a student loan market already in turmoil, said Richard Vonk, president of Key Education Resources, a unit of Cleveland-based KeyCorp.
Aiming to reduce the need for private loans, which typically come with higher interest rates, Congress last year slashed more than $20 billion from subsidies paid to private lenders in the federally guaranteed lending program and raised the limits on the amount of federal loans a student can get. Wednesday, the bipartisan leadership of the House Education and Labor Committee is expected to introduce legislation that would raise those limits again and give the Department of Education new authority to pump liquidity into the student loan market.
While students typically don't begin taking out loans until the summer for the fall term, college officials and others say they are already getting indications that private student loans will be harder to come by.Both federal and private lenders have passed their higher capital costs along to borrowers. Mark Kantrowitz, publisher of FinAid.org, a financial aid Web site, estimates lenders have increased private-loan interest rates by nearly a percentage point since Oct. 1, adding that he expects more increases over the summer.
Other lenders have gotten more selective about their lending. Some have stopped making loans altogether, including more than 30 involved in the federally guaranteed loan program."We have heard from a number of our institutions that some of the sources of private loans for our students have dried up," said David Baime, vice president for government relations of the American Association of Community Colleges.Tony Erwin, director of financial-aid services at Northeastern University in Boston, said most large lenders say they still plan to make private loans, but as for lending to families with poor credit histories, he added, "I don't think you are going to see that."
Credit agencies rate consumer credit-worthiness on a 300-to-850 point so-called FICO scale. In the past, borrowers with scores as low as 620 points could usually get a private student loan, but this year that threshold is likely to rise to about 650 points, according to Mr. Kantrowitz. While the difference is only 30 points, about 10% of all borrowers of private student loans fall into that gap, he said.Industry executives say lenders are also less likely to make loans to students going to schools with low graduation rates and high loan-default histories -- many of them for-profit technical schools. Financial-aid professionals advise students in search of private loans to first make sure that they have exhausted all of their loan possibilities under the federally guaranteed programs, which usually involve lower interest rates. Under the federal PLUS program, parents can borrow up to the entire amount of their unmet education costs, although a credit check is also involved.
"Private loans are going to clearly be harder to come by for many students," says Sandy Baum, senior policy analyst for the College Board, the nonprofit entity that administers the SAT admissions test. That's bad news at a time when grants and loans available under government aid programs have failed to keep up with rising college costs. Many students have had to rely on variable-rate private loans to fill the gap. Tighter terms for private loans will most affect students with low credit ratings and those who attend colleges with low graduation rates.
Private loans have been one of the fastest-growing ways to pay for college. In 2006-07, students and their parents took out an estimated $17.1 billion in private loans, up from $1.57 billion in 1996-1997, according to the most recent tally from the College Board. The $17.1 billion represents 22% of all the borrowing to pay for college that year.Concerns over private loans come as the federal government is trying to make sure federally guaranteed loans in its Stafford and PLUS programs will be readily available in the fall. A growing number of banks and other lenders have said they will stop making such loans because they have become unprofitable amid cuts in federal subsidies and troubles in the credit market. In response, some congressional leaders and advocacy groups are pushing for broader use of the government's direct-lending program, wherein students borrow from the government through their schools.
Private college lending faces a number of obstacles. Lenders and other institutions in the student-loan field are struggling to raise the capital to finance their activities amid a broader credit crunch. The latest to run into trouble is the Education Resources Institute Inc., or TERI, the nation's largest insurer of private student loans, which filed for bankruptcy court protection on Monday.
TERI insured more than $17 billion in privately issued student loans against default for First Marblehead Corp., a Boston-based company that acquired such loans from Bank of America Corp., J.P. Morgan Chase & Co., and other lenders. First Marblehead then bundled those loans into trusts that issued notes to investors. TERI relied on the bundling deals for its revenue, which has dried up as borrowers have been skeptical of securitizations of all kinds. So far, First Marblehead hasn't announced plans to end or curtail student loans. The company has said it's looking at "self-guaranteed loan products and products guaranteed by another third party."
Bond insurers that guarantee securities backed by packages of student loans have also run into trouble. But industry observers say that few large private lenders actually insure the loans themselves, the way TERI does. Most large private lenders simply bear the risk of the loans.
Asked about the impact of TERI's troubles, Thomas Kelly, a spokesman for J.P. Morgan Chase, said his bank has been reducing its business with First Marblehead and will continue to make private student loans using its own systems. "The lack of a secondary market is not an issue to us because we have a balance sheet we can put them on," he said. A spokeswoman for Bank of America, another First Marblehead customer, said TERI's bankruptcy filing would have "no impacts on the vast majority of our college loan customers."
TERI officials have said they hope they have sufficient reserves to cover defaults. If that isn't the case, it could have a negative psychological impact on a student loan market already in turmoil, said Richard Vonk, president of Key Education Resources, a unit of Cleveland-based KeyCorp.
Aiming to reduce the need for private loans, which typically come with higher interest rates, Congress last year slashed more than $20 billion from subsidies paid to private lenders in the federally guaranteed lending program and raised the limits on the amount of federal loans a student can get. Wednesday, the bipartisan leadership of the House Education and Labor Committee is expected to introduce legislation that would raise those limits again and give the Department of Education new authority to pump liquidity into the student loan market.
While students typically don't begin taking out loans until the summer for the fall term, college officials and others say they are already getting indications that private student loans will be harder to come by.Both federal and private lenders have passed their higher capital costs along to borrowers. Mark Kantrowitz, publisher of FinAid.org, a financial aid Web site, estimates lenders have increased private-loan interest rates by nearly a percentage point since Oct. 1, adding that he expects more increases over the summer.
Other lenders have gotten more selective about their lending. Some have stopped making loans altogether, including more than 30 involved in the federally guaranteed loan program."We have heard from a number of our institutions that some of the sources of private loans for our students have dried up," said David Baime, vice president for government relations of the American Association of Community Colleges.Tony Erwin, director of financial-aid services at Northeastern University in Boston, said most large lenders say they still plan to make private loans, but as for lending to families with poor credit histories, he added, "I don't think you are going to see that."
Credit agencies rate consumer credit-worthiness on a 300-to-850 point so-called FICO scale. In the past, borrowers with scores as low as 620 points could usually get a private student loan, but this year that threshold is likely to rise to about 650 points, according to Mr. Kantrowitz. While the difference is only 30 points, about 10% of all borrowers of private student loans fall into that gap, he said.Industry executives say lenders are also less likely to make loans to students going to schools with low graduation rates and high loan-default histories -- many of them for-profit technical schools. Financial-aid professionals advise students in search of private loans to first make sure that they have exhausted all of their loan possibilities under the federally guaranteed programs, which usually involve lower interest rates. Under the federal PLUS program, parents can borrow up to the entire amount of their unmet education costs, although a credit check is also involved.
Reference:By ROBERT TOMSHO and KEITH WINSTEIN(wall street journal)
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