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College loans see subprime fallout

Options may shrink for some students

Email|Print| Text size + By Peter Schworm
Globe Staff / March 7, 2008

The fallout from the subprime mortgage crisis is sending shock waves through the college loan industry in New England, limiting options for some students seeking assistance for the fall semester.

Amid a deepening credit squeeze and cutbacks in federal loan subsidies, New Hampshire's nonprofit student-loan agency said this week that it will no longer offer private loans. The Massachusetts Educational Financing Authority, which lent money to 42,000 college students last year, has so far failed to secure any financing for its loans, as skittish investors shy away from taking on debt.

"The broader dislocation in the capital markets has definitely affected the student loan industry," said Tom Graf, executive director of MEFA, a nonprofit state organization. "Clearly there's a trend where [investors] are hesitant to enter the market, and it's a nationwide phenomenon."

Graf said the agency would need to raise about $500 million to meet expected loan demand, adding that he remained confident it would raise the money to finance "some portion, if not all, of the loans."

Financial aid specialists are urging families not to be overly concerned, saying that government-backed loans such as Stafford and PLUS should remain readily available at capped interest rates.

"There are at least 2,000 to 3,000 lenders out there, with roughly the same rates," said Seamus Harreys, dean of student financial services at Northeastern University. Stafford loans are capped at 6.8 percent, while PLUS loans for parents and graduate students are either 7.9 percent or 8.5 percent.

Still, higher-interest private loans, which have surged in popularity in the past few years, could become scarcer and more expensive, particularly for families with marginal credit histories. Sallie Mae, the country's largest student lender, has announced it will tighten eligibility for private loans.

With a growing number of students taking out loans to handle surging tuition, that could hinder some families' ability to pay fall tuition bills.

"It really means there are going to be slim pickings for private lenders," said Clantha McCurdy, vice chancellor for student financial assistance for the Massachusetts Board of Higher Education. "It's going to be a real problem for students who have maxed out their federal loans but still need additional funds to fill the gap."

Private loans accounted for 24 percent of all education loans last year, up from 6 percent a decade ago, according to the College Board's latest survey. Private borrowing among undergraduates increased by 12 percent, when adjusted for inflation.

At Northeastern, about 20 percent of students take out private loans, Harreys said.

"We're in somewhat of a wait-and-see mode across the industry," he said. "We don't want people to panic, but we've never seen this before. Most institutions are creating plan B's and plan C's" to steer students to alternative lenders, he added.

Justin Draeger, spokesman for the National Association of Student Financial Aid Administrators, said that while lenders are having a hard time attracting money, "we have not heard of any students to date who can't find a lender for a federal loan."

Financial aid officers at the University of Massachusetts at Boston, which steers its undergraduate students toward loans provided directly from the government, and at Bunker Hill Community College said they expect their students will be able to secure higher-interest federal loans.

But Rene Drouin, president of the New Hampshire Higher Education Assistance Foundation Network, said he worries that the 5,000 students who took private loans through the network will not be able to find replacements. The move in New Hampshire followed similar scalebacks by state agencies in Michigan and Pennsylvania.

Mark Kantrowitz, who publishes FinAid, a college finance website, said he expects only a small percentage of students to encounter difficulty borrowing money. But he added that the situation remains in flux.

"It's not at a crisis point, but it's definitely something that needs to be monitored closely," he said.

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