Fewer Options Open to Pay for Costs of College

JEFF SWENSON FOR THE NEW YORK TIMES

Connie and Dave Orient plan to tap into their home equity line of credit to pay for college for their two sons. Luke is on the left.

Parents will have to navigate unfamiliar and difficult terrain when it comes time to pay for college this year, with student loan companies in turmoil and banks tightening their standards and raising rates on other types of borrowing.

Lawmakers and the administration are trying to head off any crisis by making sure that “lenders of last resort” stand ready to take the place of companies that have left the federal loan program. And a growing number of colleges have applied to participate in the federal direct loan program, in which students borrow from the government.

But families often use a combination of resources to pay for college, drawing on savings, federal loans, bank loans and home loans to plug the gap between college costs and financial aid.

Even if the government wards off problems in the credit markets and federal student loans are easily accessible, other sources of financing will become less accessible as consumers find themselves stretched thin and lenders get more choosy.

Turbulence in lending has complicated the efforts of people like Dawn R. Beaton of Mill Valley, Calif., to pay for her daughters’ education. A single mother earning less than $50,000 a year, she already has run into difficulty taking out a federal parent loan for her oldest daughter, Nicole, to attend a nearby community college. Her original lender pulled out of the market, and she is still waiting, months later, to hear from a replacement lender on that $5,000 request. She anticipates having to borrow about $10,000 to send her middle daughter to a private college in Ohio later this year.

“When I go to bed at night, I worry about it,” said Ms. Beaton, who is a financial manager for a vineyard.

“If you don’t have the money, there you are, in a serious, ulcer state. You feel inadequate.”

According to a recent New York Times/CBS News poll, 70 percent of parents surveyed were “very concerned” about how they would pay for college; only 6 percent were not concerned.

To ensure continued availability of federal loans, the secretary of the federal Education Department met on Friday with representatives of the state agencies and nonprofit companies that guarantee federal loans on behalf of the government. The goal was to work out how the guarantors would serve as lenders, if necessary. This emergency safety net has never been pressed into widespread use.

Though there is no major problem now, the lending industry is warning of a credit squeeze without action. “I would say there is widespread belief,” said Margaret Spellings, the education secretary, “that we will have a real problem, that the lender of last resort or some other solution will have to be used this year.”

Last year, students and their parents borrowed nearly $60 billion in federally guaranteed loans, a figure that has grown more than 6 percent annually over the last five years after taking into account inflation. In recent years, the growth rate has declined but may pick up as the economy slows and as other borrowing options fade.

“I want to make sure we are going to do our part, and that students will be able to go to college this fall,” Ms. Spelling said.

Lawmakers in Washington have proposed increasing the amounts that students can borrow through federal programs and authorizing the Education Department to purchase federal loans, thereby providing banks with cash to make more loans. The House Education Committee approved legislation this week that would allow dependent students to borrow a total of $31,000 through federal programs to pay for their undergraduate education, up from $23,000 now.

Still, it is difficult to gauge whether a financing problem will emerge later this year for students and, if so, how serious it might be. The disruption in the federal lending program so far has mostly been from borrowers shifting to another lender. Ms. Beaton, for example, expects her $5,000 loan request to eventually be granted. “By the time I get the money, school will probably be over,” she said.

Financial aid administrators say few students had been shut out. “I haven’t heard anything about any sort of unusual trends so far, not to say that it isn’t going to intensify,” said Daniel C. Walls, associate vice provost for enrollment management at Emory University in Atlanta. “I suspect there’s going to be more negotiating around financial aid this year than any other year that we’ve experienced.”

Admitted students are just now receiving financial aid awards from colleges, and the test will come when tuition payments for the fall term are due, aid administrators say.

“By mid- to late June, certainly July, will be the months that we really begin to understand the relative financial situations of families,” said Jean McDonald-Rash, director of financial aid at Rutgers in New Jersey.

Students attending several expensive and wealthy colleges will enjoy expanded financial aid, as those institutions move to replace need-based loans with grants. Harvard and Yale recently announced expansions of aid to families making as much as $150,000, displaying a degree of generosity that few institutions can match.

Some student advocates say lenders are exaggerating the obstacles they face in search of a bailout from Washington.

“Student lenders are trying to hype the current credit crunch to scare Congress into providing them additional subsidies and to discredit last years’ hard won higher education reform,” said Luke Swarthout of the U.S. Public Interest Research Group in Washington, referring to cuts lawmakers made last year to the subsidy payments to lenders of federal loans.

Kevin Bruns, executive director of America’s Student Loan Providers, dismissed such criticism as baseless. “Lenders’ only goal is to get the administration to use its existing authority to provide liquidity to the capital markets that fund federal student loans,” he said. “Lenders don’t need to overstate anything — the facts speak for themselves.”

There are clear signs of potential problems in the fall. It remains difficult for lenders to sell securities backed by student loans, in turn making it harder to raise capital. One guarantor of private loans, a nonprofit company called the Education Resources Institute, filed for bankruptcy protection this week.

“Everything that’s happened in the capital markets with this credit crunch has caused the fixed-income investor base to shrink, so there are fewer potential buyers of securities backed by the loans,” said Andrea L. Murad, senior director at Fitch Ratings in New York.

The House legislation seeks to address this situation by allowing the Education Department to buy student loans itself. At least 25 loan companies — including big lenders like the College Loan Corporation; the Student Loan Xpress unit of CIT; and NorthStar Education Finance — have stopped making federal loans, according to the Education Department. Some estimates put the number at nearly twice that.

Colleges generally say that more than 2,000 companies make student loans, and there are plenty of lenders to step into the breach.

No doubt to sidestep any related problems, more than 100 colleges and universities have applied to participate in the direct loan program since the end of February, according to the department. Ms. Spellings, the department secretary, has said the direct loan program could double the amount of new loans it makes to students, if necessary.

Some commercial education companies have already taken steps to ensure that their students can find lenders, in some instances by preparing to make loans themselves. Problems are more likely for those seeking private loans, which do not have any government backing. The terms of private loans, like other consumer loans, vary depending on the credit histories of individual applicants and in some cases can top 20 percent.

In the last several months, rates on those loans have risen by nearly one percentage point, according to research by Mark Kantrowitz, who publishes the financial aid Web site FinAid.org. Lenders have also tightened their standards, making it costlier for those with weak credit histories to obtain loans.

Private loans have grown sharply in popularity over the last 10 years, as families have looked for ways to pay the difference between tuition, on the one hand, and their savings and federal loan options, on the other. Last year, according to the College Board, students took out more than $17 billion in private loans, up from just $1.6 billion a decade earlier.

“If the financial aid system had kept pace with inflation, there wouldn’t be any need for private loans,” said Paul Wrubel, co-founder of TuitionCoach.com and a consultant for families trying to figure out how to pay for college.

Families also have closed the gap between college costs and federal loans by borrowing against their homes — and that is another option vanishing as house prices fall and lenders clamp down. Millions of homeowners now owe more than their houses are worth, leaving no equity to borrow against.

There is no data on how many parents may have used home equity loans to pay for higher education, researchers and aid administrators said, but there is no doubt many did, to take advantage of tax breaks and lower rates.

Tapping into home equity was always part of the college finance plan for Connie and Dave Orient of Canonsburg, Pa. She is a paralegal at a law firm in Pittsburgh and he is in the family construction business. Their older son, Christopher, is a sophomore at California University of Pennsylvania, a public institution relatively inexpensive for in-state residents. The younger son, Luke, a high school junior, wants to go to Virginia Tech, which she said would cost three times as much.

“I believe that I am in an area that is not depressed or anything,” Ms. Orient said. She added that she hoped still to be able to borrow against the house she and her husband built 25 years ago, but was unsure how much equity she really has in it and how much a lender would be willing to extend. “Nothing’s selling anywhere right now.”

Copyright 2008 The New York Times Company. Reprinted from The New York Times, National, of Saturday, April 12, 2008.