Students feeling economy's crunch

Students wanting private loans for college are facing higher costs and more stringent standards — if they manage to land loans at all.

Companies have been walking away from students at a remarkable clip due to the credit crisis. In all, 36 lenders have suspended writing private student loans over the past year, according to FinAid.org, a Web site that tracks the industry. Conditions have worsened considerably in recent weeks.

The news is not much better for the thousands of students seeking federally backed loans from private lenders. The question now is whether the $700 billion economic bailout approved Friday by Congress will stabilize credit markets and reverse the walkaway trend.

The nation's largest student-loan lender, Sallie Mae, is still writing private loans but has become "very selective," spokesman Tom Joyce said last week. That means lending only to students who have clean credit histories, and almost always requiring a co-signer such as a parent.

"The credit markets have been greatly disrupted, and frozen solid since last month," Joyce said. "Banks are not lending to one another, and there is a price for those who borrow for private education loans."

Extreme volatility in the London Inter-Bank Offered Rate, or LIBOR — the index to which Sallie Mae pegs its loans — has pushed up interest rates on new Sallie Mae loans to between 6 and 14 percent.

Across the country, private student loans last year accounted for about 22 percent of the overall student-loan market.

But even students who seek federally backed loans are, in some cases, finding them more difficult to get.

About 40 percent of those loans are made directly through the federal government and aren't affected by the market turmoil. That means students at the University of Washington, Western Washington University, Seattle University and Shoreline Community College, among others, have nothing to worry about when it comes to federal loans.

But for students in dozens of other community colleges across the state that rely on private lenders to write their federally backed loans, it's a different story. The schools have watched lender after lender pull out of the market this year, and they are monitoring the latest developments closely.

Karen Specht, the director of student financial aid at Clover Park Technical College in Lakewood, Pierce County, said the school is down to six lenders after several pulled out in the spring.

"We are questioning if we are going to lose another," Specht said. "The scary thing is that Wachovia was committed to serving our population. They were going to be taken over by Citibank, but now it looks like it will be Wells Fargo, which isn't one of our lenders."

Tacoma Community College now has five lenders, down from 10 last fall. The drop-off comes at a time when enrollment has jumped due to the poor economy, said Kim Matison, the director of financial-aid services.

The situation regionwide has led a Seattle nonprofit, the Northwest Education Loan Association, to become a "lender of last resort" for Washington and Idaho. Sponsored by the U.S. Department of Education, the association is poised to step in and make federally backed loans should the pool of private lenders dry up altogether.

Financial-aid officers at the UW and Seattle U. say they haven't yet noticed any significant disruption to students seeking private loans.

"At this point, everything seems to be pretty normal," said Janet Cantelon, Seattle U.'s director of student financial services. "We are expecting to hear about some problems, but it just hasn't happened yet."

Sallie Mae was able to get this year's students through the pipeline before conditions became so volatile, Joyce said. The company is hoping the markets calm before the next big wave of private-loan applications comes through in December and January, he added.

Like many financial institutions, Sallie Mae, officially known as SLM Corp., has been punished by the market. One day last week, the stock fell by 32 percent, prompting the company to file a letter with the Securities and Exchange Commission to say its loan portfolio is in good shape. Federal regulators, meanwhile, have extended a ban on short-selling stock — in effect, betting that prices will fall — in a number of financial institutions, including Sallie Mae.

"We do believe the bailout will have a positive impact on the credit markets, and ought to allow us to lend again at reasonable prices," Joyce said. "We sure hope so."

Nick Perry: 206-515-5639 or nperry@seattletimes.com. Information from American City Business Journals is included

in this report.