Students pinched by credit markets

What started with hammers and nails has moved to caps and gowns.

The havoc in credit markets, which started with housing last summer, has spread to college campuses across the nation this winter.

Thousands of students may find private loans for education are more expensive and harder to find as a result.

The 66,000 students at the University of Minnesota have escaped the trials of the student loan market, through special access to direct federal financing. The University of Minnesota doled out more than $150 million in student loans in the 2006-2007 academic year, the most recent year for which statistics are available.

"We don't deal with banks," said Chris Wright, director of the office of student finance.

But at many other institutions, students borrow through private lenders, and they're feeling the pinch.

NorthStar Education Finance, with a $6 billion student loan portfolio, this week informed colleges that it will suspend a rebate program.

"We are disappointed that the mortgage debt market crisis has spilled over into the student loan debt markets and are now affecting the cost and availability of funds for education loans," Taige Thornton, president of the St. Paul-based company, said in a message to colleges nationwide.

'Struggling at both ends'

Company officials said the troubles are coming on more than one front -- with banks that provide the cash NorthStar delivers in student loans and with the bond market, where the loans are bundled and converted to securities.

"We are struggling at both ends of the market," the company said. "The primary reason for temporarily suspending the [repayment] bonus is to satisfy our borrowing covenants and to maintain the support of our bankers and debt-buyers -- so NorthStar can continue to make education loans in the future."

NorthStar said its borrowing costs soared over recent months.

NorthStar's decision will hit many undergraduates at St. Olaf, where about a third of the students have loans with the company, said Kathy Ruby, financial aid director.

"Certainly we're disappointed. It was a big benefit for our students," Ruby said.

At Carleton College, loan choices for some students are narrowing. Student Loan Express, a company that Carleton had been recommending to students, recently quit making private education loans.

Rod Oto, director of student financial services, said he is shopping for alternative lenders, but has found them reluctant to commit to terms now for loans for the fall.

"Of course, we're trying to gear up for next year and give families the best advice we can," he said. "At this point, that may be more difficult than we'd like."

"So the cost increases are being passed along to the students," said Dan Thibeault, president of Boston-based student lender Graduate Leverage.

Last week, $283 million in auction-rate securities backing Minnesota Office of Higher Education student loans failed to find buyers. This week, $233 million more went begging, agency spokeswoman Barb Schlaefer said.

But unlike other borrowers, who have seen the interest rates they pay double or triple after failed auctions, the Office of Higher Education has a contract to pay no more than about 5 percent interest on its outstanding debts, she said.

The agency has about $130 million in cash -- raised from loan repayments, not from taxpayers -- and believes that's enough to finance student loans for 12 to 18 months, Schlaefer said.

In that time, the agency hopes to find new sources of money.

Nevertheless, one observer cautioned against panic.

"There is zero danger that federal Stafford loans will not be available in the foreseeable future. Zero danger," said Michael Danneberg, director of education policy at the New America Foundation in Washington.

Only about 10 percent of all college loans come from private lenders, he said. Many of those students could turn to federally backed loans if other sources of cash dry up, in Danneberg's view.