Credit Crunch

Subtle ridges were left behind ages ago in the high mountains of dirt along Interstate 29 as it passes northbound along the Nebraska-Iowa border. The places where enormous glaciers slipped through are now farmland where cattle stand in the early spring rain, despondently, making good scenery for deathly bored children watching from backseats.
While it might not be an exciting ride for kids, it’s an open road for drivers. Curves in the interstate become more gradual, and the land levels out. More hills border the far edges of the fields, like enormous dinosaur-backed bookends, and in more than one spot along the raw prairie, chestnut trees grow up through abandoned grain silos.
One glance at the starched countryside and barren farm fields is evidence that very little actually grows here this time of year. Students who will follow this road to college hope that whatever the starched countryside lacks in color will find its way into their wallets next fall.
Eventually the interstate comes to Highway 2, which leads west to Lincoln’s southern edge. Through a stunted series of streets named for letters of the alphabet, the University of Nebraska and a handful of career colleges can be found near the business district, which feels almost like an extension of the campus itself.
Here, in the heart of the office strips, is the National Student Loan Program (NSLP), a guaranty agency in the Federal Family Education Loan Program (FFELP). The organization that guarantees student loans are made by private lenders is on the frontlines, along with schools and lenders, observing how the credit crunch will affect student lending and student access to financial aid in the coming months.
Nebraska students are not unfamiliar with the student loan pinch that is encouraging many banks across the nation to pull out of the student loan game altogether. While no institution has reported having a student unable to obtain a federal student loan to date, with more lenders leaving the federal loan program on a regular basis, the likelihood is increasing. Federal guaranteed loans are popular because they offer fixed, below-market rates, but students could be required to pay higher fees to borrow money.
Administrators at traditional colleges and universities are on edge because classroom sizes could be directly impacted next fall as colleges report access to private, nonfederal loans for the 2008-9 academic year is becoming harder for students. Career colleges that face multiple start dates throughout the year are feeling the pinch already.
Along with the other 34 guaranty agencies across the country, NSLP is supporting efforts to keep private lenders in the program by educating our congressional leaders about the potential impact of their departure. There are some pending legislative proposals that might help, but analysts say it’s unclear if those will solve the funding issues that student loan lenders are facing.
"These are unusual circumstances," said Sharon O’Neal, Director of Corporate Communications for NSLP. "Legislative cuts to the student loan program have intersected with problems in the credit markets to create an untenable situation for some lenders. Many banks and non-bank lenders, like Sallie Mae and Nelnet, have to rely on securitizations and secondary markets for capital to fund student loans."
Trouble signs for career colleges came as early as March when the Career College Association (CCA) issued a bulletin that stated its member institutions were "worried about loan access." The bulletin cited a member survey that showed almost 80 percent of respondents had concerns about student access to the Federal Family Education Loan Program (FFELP), the Direct Loan (DL) Program or private loans.
Those results prompted CCA President and CEO Harris Miller and career college sector lobbyists to urge Congress to act sooner rather than later. But as congressional headway was being forged, the Pennsylvania Higher Education Assistance Agency, one of the nation’s largest student loan organizations, announced that it would temporarily stop making federally guaranteed loans.
Citibank, Sallie Mae and JPMorgan Chase followed suit, suspending lending at certain schools – a group including career colleges – and withdrawing from the federal loan consolidation market. In mid-April, Sallie Mae Chief Executive Albert Lord warned of a "train wreck" in the $85 billion education financing market without urgent government intervention.
The credit crunch and recent cuts in federal subsidies have forced a number of lenders to tighten their credit standards on private student loans. Consolidation loans have been among the hardest hit because they’re the least profitable loans for lenders, most of whom are now losing money with each consolidation loan they make. As of mid-April, in total, about 50 providers of federally guaranteed loans, as well as nearly 20 private student loan firms, have pulled out of the market.
Crisis mode
CCA’s survey isn’t the only research exposing what colleges are facing. Another recently published survey conducted by the National Association of Independent Colleges and Universities (NAICU) confirmed that nearly half of its respondents reported that access is more challenging. NAICU President David Warren said in a press release that the results "serve as a warning flare" that action is needed to ensure the problem does not become a full-blown crisis.
But a crisis it may already be. Career colleges are already looking for answers, and those might start by focusing on current students, said Greg Ayers, Senior Vice President of Policy and Administration at USA Funds.
"Anything a school can do to help retain and make sure students complete programs to keep default rates as low as possible will help," Ayers said. "Those attending institutions with high graduation rates and low default rates among their alumni may still be able to get low-cost private loans."
Ayers monitors federal legislation, regulations and policy guidance from the U.S. Department of Education. He also develops and disseminates USA Funds’ student loan policies and oversees USA Funds’ human resources and administrative services functions.
Larger banks, Ayers said, do not face the same shortage of liquid assets because they have deposits as a source of capital for student loans.
Prominent financial institutions are expected to continue making FFELP loans, and there are indications that some are using the volatile market to increase their market share as non-bank lenders are scaling back. For example, JPMorgan Chase & Company announced it was lowering fees and rates on loans, presumably in an effort to increase its market share.
On the flip side, non-bank loan providers are having a difficult time raising enough cash through asset-backed securitization (ABS) and bond deals to continue making loans.
"Non-bank lenders and secondary lenders are having a difficult time finding investors for capital loans," Ayers said. "Even when they do have investors, they are requiring such high interest rates or rates of return that it’s hard for investors to meet those."
Canary in a coal mine
Caught between banks that are backing out and others that are capitalizing on the market, many college students are going to pay higher costs for loans. At community and career colleges, some students may be denied private loans entirely because the financial industry considers them somewhat "riskier" investments than peers attending other educational institutions.
If the credit crunch is prolonged, lasting into the summer and fall, market analysts are predicting there could be disruptions in FFELP. But since ABS made up of FFELP loans are such a secure investment, investors might begin bidding on them again in the near future, Ayers said. That would allow non-bank student loan providers to raise capital.
Some college financial aid experts have high hopes for a program President George W. Bush signed into law on May 7th to stabilize the student loan industry. The program temporarily allows the U.S. Department of Education to pump government money into the sluggish secondary market for securities backed by student loans. That’s where many lenders obtain capital needed for making new loans.
As the peak summer lending season approaches, though, it’s still unclear if the measure can curb student loan shortages. With its newly expanded role in the student loan realm, the Department of Education can buy up loans until mid-2009. More grant and loan money is available for students and parents, and the terms of repayment has been eased for some borrowers. Even students with mortgage problems are protected under the new program.
But for career college administrators who have been struggling with the situation for months, it may be hard to see past the negatives in a bill that seems like too much, too late. CCA’s Miller said the hardest battle – convincing elected officials on Capitol Hill that a problem existed in the first place – has already been won.
"Our sector’s students have been the canaries in a coal mine, the first hurt by the student loan credit mess," Miller said. "In Washington, we faced a daunting task convincing lawmakers on both ends of Pennsylvania Avenue that there is a real crisis impacting real students as most talked about an ‘impending’ crisis in September when traditional school years start, not realizing many students start programs year-round.
"With the incredibly rapid enactment of HR 5715, our lawmakers recognized that higher education is the rocket fuel of a globally competitive workforce and moved quickly to protect this critical resource. We applaud their efforts and foresight. Similar action is now needed to assure that the new federal student aid does not push many of our schools over the 90-10 threshold."
Miller said the focus of attention should now return to House-Senate conference deliberations over the reauthorization of the Higher Education Act.
Now at its volatile height, the student loan market is as uneven as the rolling Nebraska landscape. With career colleges at the forefront of the credit pinch, it could be next fall before the loan market levels out for student borrowers. The market is changing by the minute as more and more banks withdraw, and there’s no telling how tight credit requirements might become.
What can be forecasted are the millions of students who will still find their way to career colleges and universities alike, hoping to live out their educational dreams. They are willing to trade whatever it costs for a clear road to college, and only elected officials and educators can hope to take down the added scenery to make it a fair, unobstructed drive next fall.