Students in the United States have lost access to more than $6.7 billion a year in education loans since private lenders fled the market, spurring schools including Pennsylvania State University and Northeastern University to turn to the Education Department's Direct Loan Program.
Dozens of lenders, led by College Loan Corp. and CIT Group, stopped making federally guaranteed loans because the government cut subsidies and investors hurt by the subprime-mortgage crisis shunned bonds backed by student loans. At least 178 schools have applied since Feb. 28 to let students borrow from the direct program, compared with 80 that applied last year.
Colleges' shift to direct loans means that students won't get discounts that banks and other lenders offered until recently. Those incentives included waivers of fees, which amounted to 2.5 to 4 percent of the borrowed amount, or a one-percentage-point reduction in the interest rate after three years of on-time payments, said Mark Kantrowitz, the publisher of FinAid.org, a scholarship and loan information Web site. Lenders that remain in the market have reduced or eliminated those discounts, he said.
Students took out about $68.2 billion in U.S.-backed loans this academic year, Kantrowitz said. The borrowing is projected to rise by almost $4 billion for the next school year as both the student population and costs increase, he said. More schools say they are seeking access to U.S. direct loans as private lenders drop out.
"Certainly, having students have secure access to funds is of the utmost importance," said Anthony Irwin, director of financial-aid services at Northeastern, in Boston. The school will switch to the U.S. program after two private lenders that served its students stopped making federally backed loans.
The Education Department is backing legislation that would allow the federal government to buy student loans from banks and other companies to ensure funds are available for further lending, said Lawrence Warder, the acting chief operating officer of the department's Federal Student Aid program. The legislation, passed by the House on April 17, needs to be on the president's desk by June 1 to help students in the next school year, he said.
The Federal Family Education Loan Program, or FFELP, requires lenders to cap annual interest rates at 6.8 percent for the most common type of loan and guarantees that the government will reimburse them for defaults. The exodus from the program so far is equivalent to 13.6 percent of FFELP loans in the fiscal year ended September 2006, Kantrowitz said.
The effects on the $400 billion loan market will start to appear in coming weeks, as families start seeking loans for the next academic year. Loan originations typically peak between July and September. No qualified applicants have failed to find loans, according to schools and government officials.
Direct lending, now with about 1,000 participating schools, grew rapidly after going into full operation in 1993, capturing about a third of the federal-loan market from private lenders by 1997. Its share decreased to 19 percent in 2007 and the number of schools dropped 18 percent, as private lenders offered borrowers incentives, such as waiving fees or giving lower interest rates.
"The plain and simple fact is, for the borrower and the schools, the private program has worked better," said Joe Belew, president of the Consumer Bankers Association, a trade group in Arlington. "You had universities and colleges vote with their feet by trying the direct program, and they left it in droves."
Lenders said Congress cut the default guarantee, the interest rates that private FFELP lenders will be able to charge in the future, and subsidies, making the loans less profitable. Meanwhile, the meltdown in the credit markets cut off capital used for lending.
