Monday, September 1, 2008

Loan cost increases pinch students

Fewer lenders and incentives, higher interest rates make it harder for borrowers to cover rising tuition.

Marisa Schultz / The Detroit News

EAST LANSING -- The credit crunch that has roiled the financial and housing markets nationwide has hit Michigan college students squarely in the wallet.

The federal student loan industry, which brought in nearly $60 billion last year, has been rocked by dozens of lenders pulling out of business, taking with them incentives that made borrowing cheaper. Many banks have boosted interest rates and upped credit score criteria, ultimately making it more costly and difficult to borrow nonfederal loans.

The chaos in the loan industry comes when students could use the help the most, with record-high tuition prices and parents stunned by layoffs and buyouts that have become commonplace in Michigan.


"It scares ... me on a regular basis," said Mandy Griffin, 18, a Michigan State University sophomore who has thousands of dollars in student loans.

"Am I really going to be able to afford all the money I'm going to have to borrow?"

Students and parents at MSU have been particularly hard hit.

About 98 percent of federal loan borrowers at MSU participated in Michigan Students First, a state-run program that offered unprecedented benefits to its borrowers: Rebates on all origination fees and 0 percent interest after three years of on-time payments. The state suspended the program in April, unable to raise the capital to buy loans.

"It was the best program in the country for students and parents," said Richard Shipman, director of financial aid at MSU, about the Michigan Students First program that saved MSU students and parents $50 million annually in borrowing costs.

"It is unlikely we will see anything like that again."

New loans cost more

Borrowers under the program -- an estimated 60,000 statewide last year -- were forced to find another lender, but the new loans would ultimately cost them more money, Shipman said.

A typical MSU freshman could pay $544 more to borrow the maximum $3,500 subsidized federal loan, compared with borrowing last year through Michigan Students First. For parents, the difference is even more dramatic: about $3,100 more to borrow a typical loan of about $10,500, assuming they made their loan payments on time to receive the interest rate reduction.

Since there are caps on how much money students can borrow through the federal government, students have turned in droves to private lenders to cover the rising cost of tuition. But interest rates are typically higher on private loans.

The credit crunch also slammed private lenders, halting new loans at the state of Michigan's MI-LOAN program this year. Lenders still in business have increased interest rates on average by 1 percent and upped their credit score criteria to at least 650, cutting off about 10 percent of would-be borrowers, said Mark Kantrowitz, publisher of

Simply put: "It's going to cost more for private student loans," said Justin Draeger, spokesman for the National Association of Student Financial Aid Administrators.

Lenders drop out

Colleges have two options to connect their students with federal student loans: direct lending, in which students borrow from the U.S. government, or indirect through the Federal Family Education Loan program, in which students borrow money from federally backed independent banks, credit unions and state agencies.

Until this year, 12 of Michigan's 15 public universities used direct lending. MSU, Eastern Michigan University and Wayne State University participated in FFEL, in part, because their network of lenders had the flexibility to offer benefits the federal government could not. The interest rates in both programs were the same, but the incentives often made the loans cheaper.

Recent upheaval in the capital markets made it impossible for many of these lenders to purchase new federal loans. So this year, FFEL schools had many students who were counting on federal loans from lenders who were no longer doing new business.

"We started seeing it in February," said Cynthia Van Pelt, interim director of financial aid at EMU.

One lender bailed out of the federal loan program, and the staff had to frantically contact students affected to tell them they need to find a new lender. Then it happened again and again.

"It just became a ricochet effect," said Van Pelt, noting she's never seen anything like this in her 30-plus years at EMU. If lenders weren't dropping out, many were reducing the incentives.

Then in April, Michigan halted Michigan Students First.

"Finally we said, 'This is crazy,' " Van Pelt said. "The incentives aren't there anymore. What is the point? We might as well do what everybody else has done (and change to direct lending with the federal government)."

This year, MSU, Eastern and Wayne State all shifted to direct lending and embarked on the cumbersome task of compelling a combined 50,000 students to sign new electronic promissory notes with the federal government.

Al Hermsen, director of financial aid at Wayne State, said direct lending should be simpler for students and won't necessarily mean higher borrowing costs. About 20 percent of Wayne State borrowers participated in the Michigan Students First program, and it's unclear how many of those borrowers could make three years of on-time payments to earn the benefit. According to the state of Michigan, about 75 percent of Michigan Students First borrowers statewide were on track to receive the 0 percent interest rate.

Other states also are affected

The lending problems in Michigan are symptomatic of a nationwide problem. Pennsylvania's higher education assistance agency also suspended its federal loan program. Big-time lenders Citibank and JPMorgan Chase stopped making federal loans to many community colleges and for-profit institutions.

Rattled by the uncertainty of the loan industry, colleges across the country abandoned the FFEL program that relied on independent lenders and turned to the most stable lender -- the federal government. Direct lending colleges shot up from 851 last August to 1,156 this month, according to the U.S. Department of Education.

Wayne County Community College District didn't make the switch to the federal government, even after more than 50 lenders dropped out of the federal loan program, said Marcus McGrew, associate vice chancellor. While the trend is concerning, the college's biggest lender, Nelnet, still remains intact.

"We have several options still available to our students," McGrew said. "Getting the funds is the most important thing and (students) are less concerned about what lender provides the loan."

The bright spot in all this: The federal government recently increased the caps on federal student loans by $2,000 annually, a move that should reduce the need for high-interest private loans. And the federal government's direct lending program is stable, said Draeger, of the National Association of Student Financial Aid Administrators. A real crisis would occur if the federal government stopped making loans, and Draeger said he can't foresee that happening.

"The doors of higher education are still open, and (students) shouldn't be deterred from attending school," Draeger said.

But Chris Rolston, 17, is stressed about paying for his EMU tuition.

"Right now I'm barely able to make it," said Rolston, who relies on loans, grants and his $7.40-an-hour campus job. "I'm working this job and plus I'm hoping to get another one off campus. ... And if I didn't have that, I don't think I'd be able to go to college."

You can reach Marisa Schultz at (313) 222-2310 or

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