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Suffering the Borrowing Blues

Low-income students and students of color may have a harder time getting some college loans because of an ongoing credit crunch and tighter underwriting rules in the industry.

While the trend may not affect federally guaranteed loans, usually the first line ofcredit for college students, it likely will have an impact on the fast-growing private loan market that serves low-income students once they reach federal lending limits, analysts say.The trend became clearer in mid-January when loan giant Sallie Mae announced plan to cut back on private loans to students attending postsecondary institutions with low rates of student success.

“We’re not going to lend at schools with poor graduation rates,” Tom Joyce, a Sallie Mae spokesman, tells Diverse. “We will do less private lending at these schools.” Joyce says this move is most likely to affect proprietary schools and not institutions like historically Black and Hispanic-serving institutions that enroll a large number of low-income students.

“We are the leading lender there, and we’re looking to grow in those spaces,” he said of HBCUs and HSIs. Yet Joyce did not say what graduation cutoff rates Sallie Mae would use in making lending decisions. The company is reviewing that issue and should developguidelines soon, he adds.

Nationwide, data show Blacks and Hispanics trailing Whites in graduation rates. While National Center for Education Statistics data show an average graduation rate of 56 percent,rates for Hispanics and African-Americans are 46 percent and 40 percent, respectively. The rate for White students is 59 percent.

The combination of trends and data provides some cause for concern. “Some lenders want to redline students at certain schools,” says Eileen O’Leary, director of student aid and finance at Stonehill College in Easton, Mass. “They may concentrate their federal lending on schools with better default rates.”

According to Joyce, Sallie Mae wrote off $1 billion in bad private loans last year. About two-thirds went to students who either dropped out or moved to part-time status,which automatically triggers repayment.

“That’s a lot of money,” he says. “It’s a winwin to invest in students who will be successful. It’s a lose-lose to [invest in] students who won’t graduate.”

Nationwide, complex factors are affecting student access to loans, O’Leary tells Diverse. The subprime lending crisis has tightenedcredit markets, making it tougher for those with poor credit ratings to obtain private loans. Recent subsidy cuts enacted through the College Cost Reduction Act mean lenders will earn lower profits through the federally guaranteed loan program.

Also, some lenders in the past would agree to make private loans to less-credit-worthy students in exchange for receiving all the federal loan business at a college or university. That practice has ended, she says.

“All lenders are concerned about raising the quality of their portfolios,” notes Mark Kantrowitz, publisher of, a Web site with financial aid guidance and tools. About 10 percent of all private education loans are considered subprime, going to borrowers with mediocre to poor credit ratings.

Some of these borrowers still may be able to get private loans in the future, but they may need parents or others to co-sign, he says.

While long-term ramifications of the trends are unclear, Kantrowitz agrees that proprietary schools may lose the most.

“You may see a shift of students from proprietary schools to low-cost public schools,” he says.

The trend should not affect the federally guaranteed loan market, though some lenders plan to cut back there as well. But hundreds of lenders compete for business in that program, O’Leary says. The federal government’s own Direct Loan program also may pick up some of this business. All of these loans come with a fixed interest rate of 6.8 percent.

But the market for consolidation loans may become more complex, analysts note. Through these loans, students combine various federally guaranteed loans, usually to get a more favorable interest rate.

One major lender, Nelnet, stated in late January that it would stop issuing new consolidation loans. “The reduced economics of student loans created by the legislative changes and credit market disruption has forced us to make difficult decisions about our level of participation in the program,” said Mike Dunlap, the company’s chairman, in a statement.

Unlike many federal loans, consolidations are more sensitive to interest rates. In fact, Kantrowitz suggests that students wait until summer 2008 to do new loan consolidations.By that time, he says, they may reap the benefits of recent declines in U.S. interest rates.


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