It’s crunch time for college students trying to secure the money they need for the fall semester. But with lenders continuing to suspend their student loan programs — the count now stands at 131 federal loan lenders and 30 private loan lenders — students may find themselves challenged to locate lenders that are still offering federal or private student loans.
  

In an attempt to help lenders be able to continue making new federal student loans, the government included a provision in the Ensuring Continued Access to Student Loans Act, signed into law in May, aimed at providing capital for cash-strapped lenders. 

Under this legislation, the Department of Education can buy federal college loans from lenders, thereby providing these lenders with the liquidity they need to continue funding new parent and student loans. The law specifically targets lenders who, in the current credit crunch, are unable to find investors in the secondary market willing to purchase their student loan portfolios.

Even with this legislation in place, however, lenders continue to find themselves forced to suspend their student loan programs. As recently as July 28, the Brazos Higher Education Service Corp., the 26th-largest originator of federal student loans in 2007, and the Massachusetts Educational Financing Authority, the largest student loan issuer to Massachusetts residents, both announced that they would no longer be able to provide either new or current borrowers with student loans.

As the suspensions of both federal and private student loan programs keep spreading through all types of lenders — large and small; for-profit and nonprofit; banks, non-banks, and credit unions; state loan agencies and schools-as-lenders — students and their families are finding themselves with fewer borrowing options to get the parent and student loans they need to pay the fall tuition bills that are coming due over these next few weeks.

Two Major Lenders the Latest Casualties of Student Loan Crisis

The Brazos Group, a primarily nonprofit group of higher education lending, servicing, and other financial aid companies, first announced that it would stop offering federal college loans back n March. In May, however, after the government passed the Ensuring Continued Access to Student Loans Act, Brazos once again began offering federal parent and student loans, saying that the government’s short-term liquidity plan had renewed the organization’s confidence in its ability to continue offering student loans.

But Brazos once again suspended its education lending program late last month, citing continued turmoil in the student loan industry.

Brazos Executive Vice President Ellis Tredway said his organization simply “ran out of time to get everything in place” to issue new student loans for the fall.

The Massachusetts Educational Financing Authority, which issued more than $500 million in college loans to 40,000 Massachusetts college students and their families last year, had already suspended its federal student loan program in April. Now, MEFA has also pulled the plug on its non-federal private loan program, which provided Massachusetts students with fixed-rate private student loans. 

“While we continue to pursue every possible option, raising the necessary funds to offer fixed–interest rate private education loans is taking longer than originally projected and has become even more challenging,” said Tom Graf, MEFA’s executive director.

Students Face the Uncertainty of Switching Lenders

With over 8 million students and parents having turned to federal college loans in 2006–07, according to the College Board, the number or families that stand to be affected by the ongoing wave of lender departures this year is not unsubstantial. 

Last week, financial aid officers at Texas A&M University — a school with over 54,000 students — heard from seven different lenders warning that they would no longer be able to offer federal student loans, a situation that has made more than a few borrowers uneasy.

Dyneche Duffield, an incoming college student headed to Houston Baptist University, is uncomfortable with the prospect of having to establish a relationship with a new lender other than her local bank, which used to offer student loans.

“I would have much rather taken out a loan there than somewhere where I didn’t know anyone,” Duffield said.

While students like Duffield may still be able to go directly to the Department of Education for their federal college loans or find those remaining lenders who are still offering private student loans (albeit with more stringent credit criteria that are making it harder for students to qualify), the magnitude of the problem within the student loan credit markets and how deeply it has permeated the college loan industry is alarming to many administrators and officials in higher education.

Kathryn Osmond, executive director of student financial services at Wellesley College in Massachusetts, finds the situation with MEFA to be particularly indicative of a long-lasting and serious problem.

“An economy that is in such a tailspin that it affects a critical agency like MEFA,” said Osmond, “is an economy that scares me.”