Mounting market woes are squeezing brokers, making it more difficult and more expensive for students to find loans to pay tuition. GW financial aid officials said they are concerned about this growing trend.
Most student loans are guaranteed by the federal government through the Stafford and PLUS loan programs, but funding for these programs is limited. As the cost of education has skyrocketed around the country, more and more students have turned to private lenders, industry observers said. Now, that pool of funds may be drying up.
“We don’t know the extent of it yet, but we’re worried about it,” said Dan Small, director of student financial assistance.
About 19 percent of student loans nationwide are private. Small estimates that at GW, as many as 35 percent of students take out such loans. Of the approximately $125 million in loans that GW students hold, about $21 million are non-federally guaranteed private loans. Three-quarters of these go to undergraduate students.
In recent years, debt obligations such as student loans and home mortgages were sold by brokers onto the financial market as bundled packages of loans traded as bonds. After this summer’s collapse of the mortgage market, investors considered these bundles undesirable. Today, brokers are finding it increasingly difficult to pass on the student loans they generate, said Joseph Nichols, a GW professor of economics.
“In general, any securitized debt right now is very hard to move, given market concerns about such products,” he said.
Additionally, new government regulations last year shrank the profits that brokers could expect to see from such loans, and some industry observers say lenders are deeply concerned about proposed rules that would allow students to shed their loans in bankruptcy proceedings.
With all of the uncertainty, lenders are holding back on some of their product offerings.
“No one wants to come in and talk to us about their private alternative loans,” Small said.
In recent weeks, a number of brokers have halted their student loan operations entirely. On Friday, Sallie Mae, the nation’s largest provider of private student loans, announced that it would lay off 350 workers. The firings are expected to be the first of many as the company works to shed costs.
Sallie Mae is one of the primary providers of private loans for GW, alongside lending rival Citibank, Small said.
Early last week, the company announced in a Securities and Exchange Commission filing that it would be much more selective about the loans it issues. It is expected that this will mean tighter credit rating requirements for student borrowers, according to industry observers.
Traditionally, requirements to access student loans have been low compared to other forms of credit, Small said.
“The restrictions are even looser than if you’re trying to get a credit card,” he said.
Small noted that major lenders are already looking to tighten their policies on campus.
“They have told us that they may have to change how they do their credit ratings and determine eligibility,” he said.
It is these changes to eligibility that concern Sandy Baum, senior policy analyst for the College Board and a professor of economics at Skidmore College.
“Panic is inappropriate,” Baum said. “Most students that borrow still have traditional federal loans. But, it could create a very significant problem for some students.”
She added, “Students who depend on these private loans might really be in trouble. These students could have no place else to turn.”
While Small is concerned about the continued accessibility of this “last resort,” he said the fallout will be manageable. Though many of the small brokers are closing down, the financial heavyweights remain relatively stable.
“Among the major banks, nobody has really come to me and said ‘Dan, we’re getting out of the student loan industry,'” Small said. “That doesn’t mean that in two months somebody won’t come to me or that we won’t start seeing the pendulum swing the other way and have them say ‘Yeah, there’s an issue.'”