No more extra credit for college loans

Already saddled with year after year of tuition hikes, college students and their families are facing a new financial squeeze: Fewer places to borrow money.

Tightening credit and higher costs have driven more than 40 companies from the student loan business in recent months. Financial aid experts predict more up-front costs for student borrowers and expect that thousands of students will have to shop around this spring and summer for a new loan provider.

Compounding the troubles, a once-common way of getting cash for college -- home equity loans -- is losing its appeal, thanks to the overall mortgage mess and dropping home values.

"Without too much exaggeration, some types of college loans will be more difficult and more expensive to get," said Brett Lief, the president of the National Council of Higher Education Loan Programs.

"Therefore the cost of college will probably increase in the process."

In the past two months, four companies have stopped taking loan applications because they can't get adequate funding through capital markets.

They are TCF Financial, St. Paul-based NorthStar Education Finance, Inc., which provides T.H.E. loans, Academic Funding Group and the company doing business as Student Loan Xpress.

On Friday, student loan giant Sallie Mae told schools that it no longer offers consolidation loans "so that we may direct more of our resources to students entering school" at a time when "loan demand will significantly exceed lender supply for the upcoming academic year," the company said in a statement. Sallie Mae will also stop waiving loan origination fees beginning May 2.

"Parents need to be aware of the situation unfolding and keep on top of it," said financial aid expert Mark Kantrowitz, the publisher of the website finaid.org. "When they look for a lender, they need to make a list of several and not just one."

In part because of fast-rising tuition rates, loans are crucial to Minnesota students.

According to nonprofit The Project on Student Debt, 72 percent of students who graduated in 2006 from schools in Minnesota had to borrow to finance their education. They graduated with an average of $23,375 in debt.

Students at the University of Minnesota and Gustavus Adolphus College have been spared the turmoil because their schools are part of the direct loan program that leaves banks and loan companies out of the process.

But other universities in Minnesota work with third-party lenders to secure federal student loans. Concordia College in Moorhead has seen two of its preferred lenders stop taking new loans. Hamline has lost three lenders that were on its list. So has St. John's University and the College of St. Benedict.

"There may be fewer lenders, but I'm not in a panic," said Jane Williams, director of financial aid at Concordia. "We still think there are plenty of loans out there. I don't think it's necessary for families to be worried."

Sandra Loerts, the director of financial aid at Minnesota State University Mankato, said that about 1,200 students there had loans with TCF and will have find a new lender. At St. John's and St. Ben's, about 20 percent of students taking out loans will have to find new lenders. The percentage is similar at Bethel University.

"It certainly isn't the end of the world," Loerts said. "But student loans are complex enough without adding another step."

That said, loans may come with fewer benefits. Currently, many banks eliminate origination fees for federal loans or provide interest-rate reductions or rebates for graduates who make timely payments.

"If those days aren't over, they're certainly numbered," Lief said.

It will also be more difficult for parents and students with poor credit to qualify for federally sponsored PLUS parent loans and private loans.

Derek Johnson is in Bethel University's master's in divinity program and was using Academic Funding Group for his federal loans. Last week, he received an e-mail from Bethel saying he would have to find a new lender in order to take summer school classes.

"I selected AFG because of the promotions that they offered, a 2 percent interest rate deduction once entering repayment," Johnson said. "For me that was a huge selling point.

"I was really hoping to use one lender for all of these loans. My thought is that if you have them all through one lender, it makes it a lot easier. It's just kind of inconvenient to have different amounts with different lenders opposed to having it all in one place."

The real estate boom saw historically low mortgage rates and home equity that grew by double digits each year. That gave many the idea to use their home equity and low interest rates to finance education for their children rather than taking out a PLUS parents loan.

That's why Thrivent Financial for Lutherans financial consultant Paul Bayer advised some parents to do cash-out refinancing or refinancing from a shorter-term to longer-term mortgage to help their children attend college.

Today, banks hurt by mortgage write-downs are increasing their credit standards, requiring parents to have optimal credit scores to qualify for home loans. Additionally, lenders don't want to extend financing to families with little equity.

Throw in declining home values and Bayer doesn't expect many families can use this strategy to fund college this fall.

Bruce Harrod had hoped to use home equity to help cover the cost of college for his son. But his plan to take $20,000 in equity out of his house fell short when last month an appraiser placed the value of his Rosemount home at $310,000 - $100,000 less than an appraisal in 2005. Refinancing and taking cash out would put Harrod below the 20 percent equity threshold to avoid primary mortgage insurance.

Now Harrod must "rethink the whole thing." Besides closely examining the family's cash flow to see if they can find extra money for school, he figures they'll have to resort to loans. But Harrod doesn't want his son to be burdened with overwhelming debt after school. "I'm going to just be broke, I guess," he said.

Jeff Shelman • 612-673-7478 Kara McGuire • 612-673-7293