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.

"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.

About 100 Lenders Suspend Funding

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.

Kaitlin Sullivan, 19, was among those filing an application. Though applying for a new loan meant more paperwork for Sullivan, the sophomore took it in stride.

"The financial aid office sent me all the information that I needed to know, and they assured me that if I followed the steps, I'd be all set," she said. "That's what I've done."

But PLUS loans don't work for everyone. Dyneche Duffield, 18, of Nacogdoches, Texas, comes from a single-parent household. She and her mother, she said, don't receive financial support from her father, and while Duffield has obtained federal student loans, her mom's poor credit history has kept her from qualifying for a PLUS loan.

Instead, Duffield, an incoming freshman at Houston Baptist University, is now applying for private loans, which generally have higher interest rates than federally-backed loans like PLUS. (PLUS loan interest rates are currently 8.5 percent; interest rates on federal Stafford loans are 6 percent this year.)

Duffield has noticed the decline in student lenders. Her local bank, she said, used to offer student loans but recently stopped.

"I would have much rather taken out a loan there than somewhere where I didn't know anyone," she said.

Federal Government Help

NASFAA's Draeger said the federal government has taken steps to shore up the student loan market through the Ensuring Continued Access To Student Loans Act, which was signed into law in May. Among other measures, it allows the U.S. Department of Education to buy government-backed loans from student lenders, thereby providing lenders with more capital that they can then use to make new loans.

The bill passed Congress and hit the president's desk "very fast," Draeger said. "Everyone's on the same page -- no one wants to see a student denied any access to a federal student loan."

Draeger conceded, however, that the credit crunch means that private loans will be harder to obtain.

Charlene Haykel, the CEO of Simply College Aid, a company that advises families on financial aid, advised that when it comes to private loans, students and families should start their research and planning early -- ideally by January of a student's junior year of high school.

"They have to be much more vigilant," Haykel said. Students and parents should treat their search for college funding, she said, "like a job."

"Too often, kids wait until the last minute," she said, "and get into very high-debt situations."

ABC News' Aaron Katersky contributed to this report.