This post first appeared in the St. Louis Beacon: August 11, 2008 - Sure as the season itself, students heading back to college this fall will be seeking a record burden of loans to finance their studies. Before they crack a book, many are in for a rude lesson in economics: The sun has emphatically set on the good old days of easy money.
At times like these, "what little money there is to go around is going to be harder to get," says Will Shaffner, director of business development for the Missouri Higher Education Loan Authority. "It's true for home loans, it's true for car loans and it's true for loans to pay for college."
As a result, students this year can expect to scrounge harder and pay more for their borrowed money than ever, and some may not be able to get it at all -- just when they need it more than ever.
With every passing year, students and their parents have piled on more and more debt to pay for college. The steep run-up in college costs has left them little choice.
Sure, there are still scholarships and grants, available from the federal and some state governments, private organizations and the colleges themselves.
But for the decade leading up to the 2006-07 school year, the increase in all types of non-repayable student aid has covered only a third of the average increase in tuition and fees at private colleges and half that at four-year public colleges, according to the College Board's latest reckoning.
As executive director of the Scholarship Foundation of St. Louis, which makes interest-free loans to needy St. Louis-area college students, Faith Sandler can attest to the result: The foundation this past spring got 473 new applications for aid, compared with 385 in 2007, an increase of 22 percent.
This year's applicants were also needier than in years past, Sandler says. So the foundation stretched, tapping its reserves for $500,000 to make 200 loans instead of its usual 150.
The foundation is a rarity, one of only a handful of sources of interest-free loans nationwide listed by U.S. News and World Report.
For the vast majority of students, the best bargains in debt are federal loans, with current interest rates of 6 or 6.8 percent. They're readily available -- for now anyway, thanks to a nick-of-time rescue.
Subsidies Cut
Last fall, reacting to reports of cozy financial relationships between some lenders and college financial aid officials, Congress cut the subsidies it pays lenders for making those loans. By spring droves of lenders were threatening to quit the market. Deborah Dey, a vice president at Webster University, watched with concern as some of the university's most reliable lenders appeared "about ready to bail."
Relief came in July, when the federal government agreed in principle to buy, for the 2008-2009 academic year, federal student loans lenders couldn't otherwise unload.
For an undergraduate degree, students can take out up to $31,500 in these loans.
That's a start, about enough to see a student through two years at a public college or university but a few thousand dollars less than tuition alone at the nation's costliest private schools.
So then what?
At every other possible turn, would-be student or parent borrowers can expect to come up against one or more of a trifecta of impediments to student loans this year -- higher rates, pickier lenders and fewer lenders to choose from.
This is true even at what many students affectionately refer to as the Bank of Mom and/or Dad. The slumping economy, with its pricier food and gas and higher unemployment, has deprived many a Mom and Dad of some or all of the discretionary income that might otherwise have paid for all or part of college.
A recently as just a year ago, it wasn't hard for parents to make up in loans the difference between college bills and cash on hand. An obvious supplemental source has been federal program that allows parents to borrow up to the full cost of a child's undergraduate education -- at an interest rate of 8.5 percent.
But many lenders that used to originate these loans are no longer willing. Ninety-seven of them nationwide, including Boeing Credit Union, have backed out of the business in the last year, according to finaid.org., a website that tracks developments in the student-loan industry.
Home-equity loans? Nice work today if homeowners can get one. While housing boomed, parents could easily use their homes as piggy banks to pay for college and other goodies. But as home prices have moved south, that handy source of quick cash has shrunk. The Federal Reserve reported in June that total equity in U.S. homes dropped by $399 billion dollars, or 4 percent, from the fourth quarter of 2007 to the first quarter of this year.
Reports of banks stiffening requirements for home-equity loans or abandoning the business altogether are widespread. Morgan Stanley last week became the latest of several big U.S. banks to tell thousands of customers they would no longer be allowed to take money from existing home-equity lines of credit.
So what's left in college financing? Bobbi B. Gajwani, a credit analyst for Standard & Poor's in New York, sees only "private" loans--those students or their families negotiate on their own in the open market.
High-cost private loans
As the cost of college has spiraled beyond ordinary people's ability to pay, private lending has "skyrocketed," accounting now for about a quarter of all of the money students borrow for college, the College Board says.
Many colleges acknowledge this by providing students and their families with lists of sources of what they sometimes euphemistically refer to as "alternative" loans. Their very mention routinely comes with a caution that borrowers should turn to them only as last resorts.
The hitch is their relatively high cost.
"We're seeing anywhere from 8.5 up to as high as 14 or 15 (percent), and those are the (private loans) we know about," says Cari Wickliffe, director of student financial aid at St. Louis University. Rates depend on applicants' credit scores.
Lenders have raised their bars now, says Tony Georges, director of student financial aid at the University of Missouri-St. Louis, where students take out $6 million to $7 million of these loans a year. "These loans are still are there, but not everybody can get them this year."
What's more, finaid.org counts 28 lenders that have exited the private student-loan market in the past year. The leave-takers include Bank of America, Bankers Trust and the Missouri Higher Education Loan Authority.
Contrary to popular impression, MOHELA is less a lender in its own right than a secondary market for college loans, buying and servicing those made by others. The agency was, however, making a "minimal" $60 million or so in private college loans a year, says Shaffner.
He says MOHELA stopped because "the crisis in the credit industry" has made it harder for the agency to get money to lend and because changes Congress made in student loan programs continue to squeeze yields on all of the loans in the agency's portfolio.
So will college students find the means to make it through the upcoming school year? As with a slow-growing cancer, a mood of watchful waiting prevails. With the government's promise to back up, federal student loans appeared to have dodged a bullet for the time being. A cautious Shaffner says it remains to be seen how -- even if -- that one-year fix is going to work.
As for the following year, Dey notes that the government has offered no guarantees.
Wickliffe says "the next six to nine months are going to be critical."
Gajwani and Marc Savaria, director for higher education and nonprofits at Standard & Poor's, say they are monitoring the situation daily, watching for evidence of students unable to enroll because they can't afford to.
Sandler worries that, with money so scarce and costly, students who manage to scratch together enough for first semester this year may come up to short for the second. "Some of the students we're giving to may not even be admitted for second semester because they have an outstanding balance," she says.
Susan Thomson, a freelance writer in St. Louis, covered education at the St. Louis Post-Dispatch.