Student Loans Drying Up, Dodd Warns

Sen. Chris Dodd (D-Conn.) warned that college students could be in a last minute scramble to find financing this fall when he spoke at a hearing Tuesday, the same day Citigroup subsidiary Student Loan Corp. announced it was suspending lending at some schools and would stop doing business in the federal loan consolidation market.

“While I am unaware of an instance to date when a student has been unable to secure a loan, the withdrawal of these lenders, the ongoing turmoil in U.S. credit markets and the illiquidity in the student loan market have fueled concerns that a potential student loan credit crunch may be looming – one which could leave millions of students in a last-minute dash to secure the financial assistance they need to attend college this academic year,”  Dodd said at the hearing of the Senate Banking Committee. Dodd is chair of the committee.

Over 50 lenders of federally-guaranteed loans and nearly 20 additional private student loan issuers have indicated that they intend to suspend their lending activities, Dodd said. Meanwhile, state loan guaranty agencies in Pennsylvania, Michigan, Montana and Texas have also effectively posted their own “closed for business” signs and indicated that they too plan to exit the student loan making business. 

Dodd reported that these lenders account for about 15 percent of the federally-guaranteed loan market and make up two-thirds of the loan consolidation business. That has taken about $8 billion out of the student lending market, primarily due to the credit crunch impacting lenders nationwide. 

Dimitri Michaud, consumer finance analyst for Kaulkin Ginsberg, said funding for college loans have also become more tenuous due to the enactment of is last year’s College Cost Reduction Act, which cut subsidies to student lenders.

However, with some 2,000 financial services firms in the government’s student lending programs, there are other lenders to pick up the slack, according to testimony from the National Association of Independent Colleges and Universities.