Scarcity of student loans fuels concerns

Stopgap laws help as mortgage crisis infects college lenders

By Steve Law

The Portland Tribune, Sep 4, 2008, Updated Oct 30, 2009 (14 Reader comments)

L.E. BASKOW / Portland Tribune

Chef Bruce Bowers leads a patisserie and baking class at the Western Culinary Institute. The school launched an internal loan program three months ago to help students who were rejected by private lenders.

It was daunting enough that Lyssa Story faced $45,000 in college debt after enrolling at the Western Culinary Institute in January.

Then this summer, three lenders rejected her loan requests for some of that money, after her credit rating slipped due to unexpected medical bills.

“It almost got to a point where I was going to have to leave school,” said Story, 24, who hopes to manage a hotel restaurant or bar after graduation.

Story’s predicament is not uncommon.

The banking crisis triggered by the mortgage loan debacle has infected college lenders, just as the sagging economy lures more adults back to school to bolster their job prospects.

Symptoms of that infection:

• Students at Portland Community College and Warner Pacific College reported completing loan applications, only to learn mid-transaction that their bank was no longer lending to college students.

• At least 100 lenders have halted new federally backed college loans, including Washington Mutual, Wells Fargo, Bank of America and Boeing Credit Union, according to the National Association of Student Financial Aid Administrators.

• More than 30 lenders stopped issuing private loans for college, including Washington Mutual and Bank of America.

• Lenders slashed more than 4,600 jobs held by college-lending specialists.

As Portland students filter back to campus this month, some administrators say they’ve weathered the turmoil in the financial aid industry, and that most students should get the loans they need.

But it required stopgap congressional action in May — parts of which will last only one year — and bold initiatives by local institutions such as Warner Pacific and the Western Culinary Institute.

“I think there was a crisis looming, but I think the crisis was averted,” said Dave Hawn, a senior vice president at Educational Credit Management Corp. in Eugene, the official guarantor of federally backed student loans for Oregon. Overall, more aid will be doled out to Oregon students this year than last, Hawn said, partly due to rising enrollment.

But the industry shakeout is causing more trauma for students and institutions that rely on nonfederally backed private loans. Nationally, one in 10 students uses private loans, and the loans account for one-fifth of all financial aid issued. Working-class students and trade schools such as the Western Culinary Institute often are more dependent on the private loan market.

And there’s uncertainty about what happens next year, said Mark Kantrowitz, publisher of a financial aid Web site, www.FinAid.org. He calls the congressional intervention a “one-year Band-Aid that averted a crisis.”

Colleges respond

Story was able to remain in school thanks to a $7,000 promissory note offered by Western Culinary’s corporate parent, Illinois-based Career Education Corp., which created a new loan program for students who were denied private loans.

“It was definitely scary for a while,” said the school’s president, Jon Alberts. Enrollment seemed to be falling earlier this year due to lending problems, Alberts said, but appears to be rebounding since the internal loan program was launched three months ago.

Western Culinary student Miles Jascha, 26, also is taking advantage of the internal loan program after getting rejected for private loans.

“As long as I can go to school and still make it, that’s what matters to me,” Jascha said.

Warner Pacific, on the southern slope of Mount Tabor, took a bolder step in late spring. The private college slashed 2008-09 tuition to $16,000, down from $22,000 last year, said Lani Faith, Warner’s marketing and campus relations director.

Portland Community College financial aid staff had to rustle up alternative lenders when students learned their bankers were exiting from student loans, said Corbett Gottfried, PCC financial aid director.

But PCC students haven’t been affected that much, he said. Federally backed Stafford loans provide the lion’s share of financial aid for PCC students, and those remain widely available, even if the pool of lenders has shrunk.

Emergency legislation signed in May enabled students to borrow an additional $2,000 a year of Stafford loans, the main federal student loan program. New Stafford loans now are capped at 6.8 percent interest or lower, providing further relief for students.

The new law also shored up college lenders by enabling the U.S. Department of Education to buy their loan portfolios, at least for one year.

The Oregon Legislature also boosted financial aid as part of a new “shared-responsibility model” enacted in 2007. Spending on the state’s signature need-based aid, the Oregon Opportunity Grant, will grow from $34.6 million last year to $72 million in 2008-09, said Susan Degen, the program’s administrator.

Degen said talk of a crisis may have been overblown, at least in Oregon. “We’re not seeing any huge issue for students being able to get student loans for the fall,” she said.

Kantrowitz estimates that 2 percent of all students could be denied loans this year, and others will face steeper costs.

The federally guaranteed Parent Loan for Undergraduate Students, or PLUS, stiffened its credit requirements. If a student or student’s parent had a real estate foreclosure in the past five years, that could nix their loan, Kantrowitz said. About 20 percent of PLUS applicants were rejected last year, he said, predicting it will rise to 30 percent this year.

So far, though, there’s been no significant increase in PLUS loan denials in Oregon, Hawn said.

Private loans the diciest

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