Tens of thousands of US students may face problems paying their college bills this year as the student loan market becomes the latest victim of the credit crisis.
A rising number of private and public lenders have been backing out of offering student loans, hit by the fallout from the credit squeeze and the declining profitability of federally-insured education loans.
The problem is becoming increasingly urgent because most loans are arranged between now and August, when term begins in many colleges. The influential Senate banking committee will today quiz a panel of student finance experts on the issue.
Loans to students presently in college in the US totalled $78bn (€49bn, £39bn) in 2006-07, a figure greater than the gross domestic product of Morocco. But since last August at least 50 private and non-profit lenders, who in 2006 lent to 800,000 students and provided 13 per cent of loans, have withdrawn their services, according to Finaid.org, a student loan website.
A significant proportion of the rest of the market could follow, said Tom Deutsch, of the American Securitization Forum, which represents loan originators. That may make life more difficult for those in higher education.
The effect of the squeeze in student loans is likely to hit those with poor credit scores and low incomes. Plus loans (made only to parents with decent credit histories), which provide the most comprehensive student financing, require credit checks, including history of foreclosure.
Mr Kantrowitz estimates that 2 to 3.5 per cent out of 9m US college students, or at least 100,000 students, will fail to qualify for federal or private loans this year because of poor credit.
"The people who are jeopardised in the mortgage crisis may have children in college," says Patricia McGuire, president of Trinity College in Washington DC, a private college that largely caters for African-American and Latino students from lowincome families.
Those whose credit scores leave them ineligible for Plus loans can still take out Stafford loans (made to lower and middle income families), but these rarely cover the full cost of higher education and are often supplemented by variable-rate private loans. Furthermore, the $17bn private loan market is also facing severe problems.
The drying up of the market for loan-backed securities since the credit squeeze hit has removed a crucial source of funding for non-bank lenders such as Sallie Mae, the biggest originator of student loans, and no private loans have been securitised since last September.
The Department of Education says it does not know of a student who has yet been unable to get a loan, and is prepared to use the federal government's student funding programmes to act as a "lender of last resort".
www.ft.com/creditsqueeze