Credit crunch making student loans harder to find
By MARCY GORDON AP Business Writer

WASHINGTON (AP) - The supply of education loans is shrinking as credit tightens, creating an opportunity for Sallie Mae and some big banks to pick up market share as some lenders retrench. Collegebound students are the ones who might get squeezed in the process.

Smaller lenders such as College Loan Corp. and Nelnet Inc. are being forced to scale back as their ability to sell packages of studentloans to Wall Street and other investors is crimped. Sallie Mae, the nation's largest student lender, and investment banks, on the other hand, are well-financed and have more flexibility to keep the lending spigot open.

Even though the Federal Reserve has cut a key interest rate five times in recent months, the shakeout in the student-loan industry will make it more expensive for students to borrow money, assuming a reduced supply of funds.

Lower-income students will feel the brunt of it, college administrators say. Both federally guaranteed studentloans and higher-priced private loans are being affected.

The entire studentloan industry has been under pressure in recent months. Rising delinquencies last year applied the initial strain. The global credit crunch triggered by the collapse of high-risk mortgages aggravated the situation. And studentloan legislation that took effect in October cut about $20 billion in federal subsidies to lenders.

The latest squeeze on student lending is tied to trouble in the $330 billion market for auction rate securities, about $80 billion of which is made up of bundles of studentloans. Since some of these investments are backed by troubled bond insurers, investors have been particularly reluctant to buy these securities, straining the student lenders that sell them to raise cash.

As the distress in the auctionsecurities market deepened last week, Michigan said it was temporarily suspending one of its college loan programs, and Montana's student-loan agency tried unsuccessfully to sell $300 million in bonds.

Twenty-one House Democrats asked the Bush administration in a letter Friday to shore up the market before the situation worsens and students are deprived of the chance to attend college.

Shares of Nelnet rose 45 cents, or 4.5 percent, to $10.50 Tuesday after investment firm Friedman, Billings, Ramsey & Co. upgraded the company, saying the government will likely intervene to help get cash flowing into the hobbled student lending market. But Nelnet shares are still far from their 52-week high of $29.34.

As the market for college loans soared to $85 billion annually, so did the number of specialized lending companies wanting a piece of it. Unlike major banks, student lending is the primary, if not sole, business of the companies, such as College Loan, Nelnet, EduCap, NextStudent Inc., StudentLoan Corp. and Education Finance Partners Inc.

Faced with new, unwelcome dynamics, some of those specialized lenders are scaling back.

College Loan said recently it will depart the federal studentloan business, falling back on its private-loan operations. Nelnet stopped making consolidation loans, which student borrowers use to combine their federal loans to secure a fixed interest rate and lower monthly payments.

Student lenders that depend on the auction-securities markets to fund their loans ultimately will find another method, said Matt Fabian, managing director at research firm Municipal Market Advisors in Westport, Conn. One way could be to package the loans into securities with fixed rates, he said.

Sallie Mae, formally known as SLM Corp., has been roiled by financial losses, a failed buyout and management stress, yet the $30 billion credit it secured from major banks to fund its loans insulates the company to some extent from the auction market turmoil, experts say.

Students and their parents, meanwhile, may have to intensify their loan search and redouble efforts to tap government aid for college. The advice from experts is the same, but amplified given a potential shake-up: Borrow as little as possible and try to get as much federally backed aid as possible before turning to higher-cost private loans.

As companies tighten their lending standards, "More students are going to need co-signers" on private loans, Kantrowitz said. Overall, however, he predicted that students will still be able to find loans.