Money Matters

Twenty dollar bills with orange overlay

Ask Jevita R. de Freitas whether students at George Mason University are having trouble getting loans this year and she raps her desk sharply. "I have to knock on wood, because we've been very lucky," says de Freitas, director of the Fairfax, Va., school's student financial aid office.

At a time when a bad economy makes loans more important than ever, she says, many of her colleagues have seen their usual lenders pull out of the student loan business. One even had a bank that had already approved loans for this school year abruptly go out of business. "There's still the distinct possibility that next year won't be any better than this year and could possibly be even worse," she says.

Today's rocky economy has forced many lenders to tighten eligibility criteria. Others have eliminated their student loan programs altogether, including APA's own program with Chase bank (see APA's loan program closes).

New legislation, however, appears to be easing the crisis. And graduate students may be better positioned than undergraduates to fund their educations.

An industry in turmoil

The student loan industry is having an increasingly tough time making the math work, says Peter Warren, executive vice president of the Education Finance Council.

On one side of the equation, he explains, is the cost of lending. Thanks to the subprime mortgage crisis, investors are especially wary about taking on risks.

"What really pushed things over the edge for a lot of lenders was a situation in the capital markets where the costs to finance loans started to creep up," Warren says. "At this point, those costs have risen dramatically from what they were a year ago."

At the same time, the yield on federal student loans has dropped. The College Cost Reduction and Access Act of 2007 cut government subsidies to lenders offering federally backed student loans. As a result, many lenders have simply eliminated their student loan programs, both federal and private. According to Mark Kantrowitz, publisher of, 134 lenders have suspended their participation in federal student loan programs and 33 have suspended their private student loan programs since July 2007.

Now the government is taking action. The Ensuring Continued Access to Student Loans Act, signed into law in May, may help shore up the student loan marketplace. The act gives lenders access to loans from the U.S. Department of Education and allows them to sell their loan portfolios to the department if they can't find other financing. What impact the act will have on the loan industry remains to be seen.

"The situation is very much in flux," says Warren.

The government's bailout of mortgage giants Fannie Mae and Freddie Mac and insurer AIG may also help, adds Kantrowitz.

"It may have confidence-boosting benefits for the capital markets as a whole," he says, noting that improvements in one area tend to spill over into others. It was "contagion" from the subprime mortgage crisis that caused the problems with student loans, he points out, but contagion can work both ways.

Which students will be hit?

The turmoil is affecting some students more than others. Those who rely solely on federal loans are in the clear, says Shelly Repp, JD, general counsel at the National Council of Higher Education Loan Programs.

While some lenders have dropped out, he notes, others have picked up the slack.

"As far as we know," says Repp, "there's nobody who's looking for a loan in the federal program who can't get one."

However, students who depend on private loans may have trouble finding funding—even if they got loans in the past, says Justin S. Draeger, a spokesman for the National Association of Student Financial Aid Administrators.

"Like any consumer loan right now, private loans are going to be more difficult to get," he says. "You'll need a higher credit score. And they'll probably be a little costlier as lenders try to hedge their bets against future losses."

That said, graduate students may have an advantage when applying for student loans, he notes.

"Because grad students have already made it through their undergraduate programs, most lenders view them as a safer investment," Draeger says.

One advantage undergraduates do have, notes Draeger, is a series of interest rate cuts in the federal Stafford loan program. The cuts began last summer and will continue for the next few years. But community college students and those at for-profit universities may also be particularly vulnerable to a tightened lending atmosphere, says Warren. That's because lenders view them as riskier investments, he notes.

It's still unclear what impact the growing difficulty of getting private loans will have on students.

"There undoubtedly will be some students who will be forced to switch to less expensive schools or forced to rethink their education plans," says Kantrowitz.

Is there a silver lining? "Some people might say that students should never have been borrowing as much as they have for their educations," says Kantrowitz.

He's not so sure.

"In an ideal world, the federal government would have loans for students up to the cost of attendance, so there would be no need for private student loans," he says. "But that's an ideal world, and we don't live in that world."

By Rebecca A. Clay

Rebecca A. Clay is a writer in Washington, D.C.