Is Your Student Loan Safe?

July 30, 2008 — -- Forget back-to-school shopping: With just a few weeks to go before the start of the fall semester, many college students are doing some last-minute student-loan shopping as more and more cash-strapped lenders drop out of the student loan business.

Texas A&M University financial aid director Delisa Falks said that in the last few days, the university has heard from seven different lenders saying they could no longer provide federally guaranteed loans.

It's a problem that has been ongoing nationwide for months, leaving many students with fewer options for financing their college educations.

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Falks said that while there are many other lenders to take the place of the recently discontinued lenders, "it's very disappointing that it's gone this way in the student loan industry."

Student loan companies traditionally raise capital by selling bonds, but as a fallout from the subprime housing meltdown continues to shake the country's financial sector, investors have become wary about putting their money into student loans.

As a result, "lenders have been having a hard time raising enough capital to continue making loans," said Justin Draeger, a spokesman with the National Association of Student Financial Aid Administrators.

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"The whole problem in the capital markets started with mortgages and has drifted down," said Thomas Graf, the executive director of the Massachusetts Educational Financing Authority (MEFA), which this week announced that it would not provide funding to 40,000 students and families.

"Difficulty in the capital markets in the last few months has made it extremely difficult for us to secure funding for the fall season," Graf told ABC News.

Lenders have had another reason to exit the student loan market: a change to federal law last fall cut interest rates on government-backed loans and reduced subsidies to lenders, making student loans less profitable.

Since March, roughly 100 U.S. lenders have suspended their government-backed student loan programs while nearly 30 have also stopped their private student loan programs, according to the NASFAA statistics. (Find the NASFAA list here.)

MEFA, a state non-profit agency, had already announced in April that it would not be providing government-backed student loans. This week's announcement pertained to low-cost private loans.

The suspension of MEFA loans and others have led students and families to scramble for alternatives. Lynne Meyers, the director of financial aid at College of the Holy Cross, said that on Tuesday alone, her office received 120 applications for PLUS loans, government-backed loans that parents take out on behalf of their children.