A lot of students are heading off to college or vocational schools in coming days will learn a tough, if timely, lesson in economics: The credit crunch has made some education loans harder to get.
Most of the more than 7 million student and parent borrowers won't come away empty-handed because of the general availability of funds guaranteed by the federal government. Yet some borrowers, especially those attending community colleges and technical institutes, will have trouble obtaining money, and others will face higher interest rates or other unfavorable terms, especially on private loans.
Different situation arise with subprime mortgages, the market for student loans never stopped functioning and no crisis developed. Yet the credit market hasn't calmed down completely, and various problems still lie in wait.
It's not unlike the situation faced by a struggling student who survives a pop quiz but still faces a grueling final exam.
"Most of the lenders, if not all of the lenders, are making private loans more difficult," said Fred Lockhart, executive director of the Arizona Private School Association.
Mark Kantrowitz, publisher of finaid.org, a well-known, financial-aid Web site, said that about 130 lenders have suspended participation in federal loan programs and that 29 have stopped issuing private education loans.
About 47 percent of families borrow money to help get kids through college, according to a study released Wednesday by lender Sallie Mae and Gallup.
The study affirmed that federal loans are easily the most popular source of borrowing.
In general, parents foot roughly half the bill for a typical student, while students themselves pay about a third, with remaining costs covered by scholarships, grants, friends and relatives, according to the study.
Most postsecondary institutions report that students are still able to secure federal education loans. But many community-college and tech-institute students in particular have been left without money as schools scramble to retain those students.
Plus, other economic difficulties come into play in the wake of the yearlong credit crunch sparked by subprime-mortgage woes.
For starters, tighter lending standards and falling housing prices have made it harder for parents to tap home-equity loans and lines of credit to pay their kids' education bills.
Also, the roughly 20 percent drop in the stock market in recent months has eroded the value of parent investment accounts, also making less money available for college.
On average, parents borrow about one-third of what they spend on their kids' college educations, according to the Sallie Mae/Gallup study. Students borrow about two-thirds of what they pay.
Lenders pressures.
Even before all this hit, federal legislation passed in 2006 and 2007 reduced the profitability of federal loans for lenders, said Bob Murray, a spokesman for USA Funds, which serves as the education-loan guarantor in Arizona.
When the crisis hit, it made it that much more difficult for lenders to raise capital for use in loans.
"Investors have been scared away," Murray said.
"(Lender) costs have increased, and their revenue has been reduced."
To prevent more lenders from pulling education loans, Congress passed the Ensuring Continued Access to Student Loans Act of 2008, which steadied the market, Murray said.
After passage of the legislation, national lenders Sallie Mae and the National Education Loan Network announced that they would serve every eligible student who applied for a federal loan.
John Nametz, director of financial aid at the University of Arizona, said the main issue arising at four-year universities pertains to students who previously used lenders that no longer are making loans. These students will have to find a second lender, resulting in two separate loan payments after graduation.
It doesn't help that "consolidation" loans, used by many graduates to combine various debts into a single payment, have been impacted more significantly than many other types of student loans.
More than two-dozen consolidation lenders have stopped or limited their activities.
Still, students attending four-year universities will have a relatively easy time securing loans because their debts are the most profitable variety for lenders, experts say.
Four-year students usually need larger loans because they spend more time in school.
Community colleges hit
The impact is being felt more severely among community-college and vocational students, where financing is tighter in general.
"As a community college, our students can only borrow up to a certain level of loan because they're considered a freshman or sophomore," said Ellen Neel, director of financial aid at Glendale Community College.
JPMorgan Chase and Citibank, two former high-volume lenders at GCC, have stopped lending at the college, Neel said.
She encourages students to max out on federal loans before taking out private debts, which carry higher interest rates and fees.
However, federal financing and personal funds won't always cover the bills, requiring some students and parents to venture into the private-loan market.
"(Lenders) were very loose on the qualifications in the past," Neel said. "(Since then, many firms) have either pulled out of private loans or have made their qualifications more stringent.
April Osborn, executive director of the Arizona Commission on Postsecondary Education, said students attending private and for-profit schools are more likely to turn to private loans, and now they're struggling.
"Generally, a private school will work with certain lenders to help their students find funding, and some of these lenders are leaving the business," Osborn said.
About 360,000 people complete a private postsecondary program every year in Arizona, Lockhart said.
Almost 200 private, postsecondary schools are licensed in the state. At 85 of these institutions, students are eligible to receive federal aid, Lockhart said.
At the remaining schools, students must rely more on private loans.
One result of the credit crisis is that lending standards have gotten tighter across the board. This means students increasingly must turn to a parent or other co-signer with good credit, Lockhart said.
Gabriel Aguirre, 21, of El Mirage, wants to enroll in the eight-week program at Mobile Dynamics Car Audio School in Tempe in order to gain certification for installing sound systems.
He applied for a private loan with a personal FICO credit score of 650 but couldn't get a loan with an interest rate below 20 percent.
Students in the Mobile Dynamics program aren't eligible for federal funding. Credit scores in the mid-600s are generally considered subprime.
"My credit was good but wasn't good enough," he said.
Aguirre's goal was to gain certification so he could work at his brother's automotive shop. Because of the lack of a loan, those plans are on hold.
Enrollment dips
Tom Gazda, owner of Mobile Dynamics, said enrollment at the school is down 50 percent from last year because students are having trouble getting private loans, prompting him to lay off half his staff since January.
Nearly 300 people went through his program in 2007, but he expects half that many to finish in 2008.
Kirt Hamm, founder of the Conservatory for Recording Arts and Sciences, with two campuses in the Valley, said his school has seen enrollment fall by 20 percent because students can't secure private loans.
His 42-week program costs $18,440, and the federal loans for which his students are eligible don't always cover all their expenses.
"In many cases, students with a credit history who would have been eligible for private loans nine months ago now are not because the lending community has changed its criteria," Hamm said.
He usually has 800 new students in the program each year but expects that number to drop.
Other private programs, such as the ITT Technical Institute, have been able to set up internal funding programs to help students who would have problems securing private loans.
"Our company has been very active in this situation," said Chuck Wilson, director of ITT's campus in Tempe.
Wilson said the campus saw an increase in enrollment from 2007 to 2008, although he wouldn't specify how much. The school also opened a campus in Phoenix earlier this year.
"We've actually changed some of the lenders that we're working with because we're trying to maximize opportunity for our students," he said.
