Development & Aid, Economy & Trade, Education, Financial Crisis, Headlines, North America

EDUCATION-US: Credit Crunch Hits College Students

Matthew Cardinale

ATLANTA, Oct 23 2008 (IPS) - The credit crunch is limiting college access for some students in the United States by making it more difficult for them or their parents to obtain student loans to finance the steep cost of a four-year education.

Sophomore Armando Huipe, 19, found himself with a 4,500-dollar bill to the University of California, Los Angeles (UCLA), after he and his father were both declined for private student loans to help pay for Huipe's fall 2008 semester.

Huipe cannot register for more classes until the bill is paid off. He receives a grant from the State of California that pays most of his tuition. He also takes out a federal Stafford loan for about 5,000 dollars per year.

However, he is still short about 13,000 dollars per year toward paying the total cost of tuition, fees, room, board, books, travel, and incidentals, he told IPS.

Huipe does not qualify for a federal Pell Grant, aimed at low-income students, because his parents are middle-class and make about 90,000 dollars per year. "I don't know if they take into consideration a mortgage and a car payment," Huipe said.

"I applied to Citibank, Wells Fargo, and Chase. Wells Fargo I applied on my own once, and applied with my father as a co-signer and they also denied me [then]. He has a mortgage out and a car loan out," Huipe said.

In his freshman year, Huipe's parents put some of his educational expenses on credit cards. "That was what we were going to do this quarter but I just didn't let my parents do it," Huipe said, adding they have high interest rates.

Now, Huipe is thinking about dropping out of school and postponing his studies in biochemisty in order to work and save money, and maybe move back in with his parents. If he does this, however, his existing student loans will become immediately repayable.

Across the U.S., the economic downturn has affected loan access for students in at least two ways. First, it has led banks to suspend or discontinue offering private student loans, upon which many students and parents rely. Other banks have tightened their lending, raising the minimum credit score for which they will approve a loan.

Second, it has also prompted banks to pull out of the business of providing loans through the Federal Family Education Loan Programme (FFELP), even though those loans are backed by the federal government.

So far, 137 lenders have suspended or discontinued their participation in FFELP and 36 lenders have completely stopped offering private student loans, according to, an informational website.

Citibank and Bank of America had been the second and third largest student loan originators in 2006 and 2007, respectively, but both have suspended making private loans.

The national top 100 student lenders, including the College Board, College Solutions Network, Frost National Bank, HSBC, PlainsCapital Bank, Sovereign Bank, and TCF Bank, have stopped offering FFELP loans. Access Group and NelNet have stopped offering private student loans.

Even though the FFELP loans are backed by the federal government, lenders are pulling out mainly because "they have not been able to solve their liquidity problems. They just don't have sources of money to lend," Larry Zaglaniczny, vice president for governmental relations for the National Association of Student Financial Aid Administrators, told IPS.

"The credit crunch is not having an effect in the availability of federal loans. There are problems; we've not heard of any access problems. On the other hand, with private loans, they're more difficult to get. Fees have gone up. Interest rates have gone up," Zaglaniczny said.

Members of the U.S. Congress were obviously concerned about the health of the FFELP programme when they authorised the Department of Education to purchase FFELP loans from private lenders in order to replenish the banks' liquidity.

The Ensuring Continued Access to Student Loans Act of 2008 authorised these purchases through July 2009. In September 2008, Congress voted to extend the Act for another year; the extension was just signed by President Bush on Oct. 7.

"Continuing constraints in our capital markets have posed challenges for students and student lenders throughout the last year," Treasury Secretary Henry Paulson and Education Secretary Margaret Spellings said in a joint press release.

"Our financing programme has supported just over 40 percent of the [FFELP] loans that have been disbursed this year. Over 800 lenders have enrolled in our loan purchase programme," Paulson and Spellings said.

Meanwhile, Sens. Ted Kennedy, Charles Schumer and others have been encouraging schools across the nation to enroll in the Direct Loan Programme, where students essentially borrow directly from the U.S. Treasury.

However, for some families this academic year, all of this may be too little too late.

Many students and parents are often forced to take out private student loans, at least for part of the cost of education each year, for several reasons. These are the loans currently drying up.

The amount of private student loans has increased by over 750 percent, from 1.5 billion dollars annually 10 years ago, to 17 billion dollars today, while total student aid has increased only 61 percent during the same period, according to the College Board, a nonprofit association of colleges and universities.

With the cost of education rising every year, federal student loans and grants tend not to cover the entire cost of education.

In the 2007 academic year, average annual in-state tuition costs were 6,185 dollars for public universities and 23,712 dollars for private ones, according to the College Board. Room and board charges together average 7,404 and 8,595 dollars, respectively. This still does not include fees, books, supplies, travel, or incidentals.

One reason students turn to private loans is because there are annual limits, as well as lifetime limits, for the amount students can borrow under FFELP's Stafford Loan programme.

While low-income students are also eligible for need-based grants such as the Pell Grants – which were also recently increased by the new Democratic-controlled Congress -middle-class families like Huipe's tend to be ineligible for such grants or are awarded smaller amounts.

Earlier this month, Sen. Schumer wrote a letter to Chairman Ben Bernarke of the Federal Reserve System and Treasury Secretary Paulson, warning them of the situation.

"As you continue to respond to this debilitating credit crisis, I am urging you to keep a close eye on the student loan segment of the market," Schumer wrote.

"Now more than ever, students and parents are concerned about their ability to pay for a college education. As banks continue to tighten lending criteria, increase borrowing costs, or simply restrict lending entirely, some students will inevitably be hurt," he said.

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