More banks backing out of loans for community college students

Citing uncertain financial times, an increasing number of national banks are curtailing their lending relationships with community colleges, all the while continuing to loan to students at more lucrative institutions.

Several local schools - including Harper College, McHenry County College and Waubonsee Community College - are feeling the pinch.

JP Morgan Chase spokesman Tom Kelly said the financial giant in May suspended lending to Illinois schools that provided the least amount of business.

"Given what the interest rate is, and what the subsidy of the loan is, some schools are just not profitable enough to take the risk of making those loans anymore," Kelly said.

Community colleges aren't as profitable to banks for a number of reasons.

With lower tuition costs, they tend to have fewer borrowers. Those community college students who do take out loans tend to borrow less than students at more expensive, four-year institutions.

With a higher percentage of financially independent students, community colleges also tend to have a higher default rate.

Citibank spokesman Mark Rodgers said that on May 1, the bank's Student Loan Corporation Unit "temporarily suspended" lending at schools that have loans with lower balances and shorter periods over which the bank can earn interest.

Financial aid administrators charge that this move is squeezing the neediest of students.

According to the American Association of Community Colleges, 6.5 million undergraduates attend community colleges. One third of those students are minorities. Another third are reliant on loans.

About 1,100 of Harper's 25,000 students take out loans, a majority from major lenders, Scholarship and Financial Aid Director Earl Dowling said.

"Seeing lenders pull away because students don't have to borrow as much as students from a four-year university, that's a sad state of affairs," he said.

Waubonsee Community College in Sugar Grove lost four lenders - JP Morgan Chase, Citibank, PNC and Oxford Bank - in the last year, Director of Student Financial Aid Services Chuck Boudreau said. The 10,000-student school sees about 5 percent of its population take out loans each year.

McHenry County College in Crystal Lake processed 868 loans for the 2007-08 school year, Financial Aid Coordinator Laura McGee said. As of early this week, the school had processed 277 loans for the current academic y ear.

"We're in such disarray because of all this," she said of having lenders refuse services to students. "It is making it very difficult for the students and for staff to keep track of all of the changes. This could really affect default rates in the future with the students having to change their lenders so frequently."

The frustrated schools are all exploring the option of offering direct loans - which allow students to borrow directly from the federal government.

An April 15 survey by Student Lending Analytics, a California-based data company, reported that 7.2 percent of community colleges now participating in the Family Federal Education Loan Program have already decided to switch to the federal direct loan program, and another 28.9 percent are contemplating such a switch.

"There's definitely an increased level of interest (in direct loans)," National Association of Student Financial Aid Administrators President Phil Day said.

"More community colleges in particular are taking a look at that option."

Elgin Community College has used the direct loan program for more than a decade, Vice President of Business and Finance Sharon Konney said.

Approximately 1,200 of the school's students take out direct loans per year. Only a few dozen take out loans from lenders, she said.

Oakton Community College in Des Plaines this fall began offering direct loans, Financial Aid Director Cheryl Warmann said. "I did make the decision in part so we could make sure our students had access to capital," she said.

Dowling called direct lending "a very viable alternative."

Later this fall after a new software system is implemented, "we'll be ready to take a harder look," he said.

In the meantime, recent state and national legislation are serving as Band-Aids to the credit crunch.

The U.S. Department of Education in May announced a plan where lenders can sell their loans to the government through September 2009. "It's a bit of a short-term fix," Boudreau said, "But the federal capitalization is helping."

The plan allowed at least one bank that had backed out of lending to Waubonsie students to climb back on board, he said.

Democratic Sens. Christopher Dodd and Patty Murray in June introduced legislation that would stop lenders from discriminating against students based on the school they attend, the length of their college program, or their income level. The plan is under review, Murray press secretary Matt McAlvanah said Tuesday.

Saturday, Gov. Blagojevich announced a partnership between the state and eight Illinois-based credit unions that invested $100 million in securities to finance low-interest, federally backed loans.

Because the Illinois Student Assistance Commission, not the lenders, will determine who gets the loans, community college students' requests are considered with the same weight as students from 4-year institutions, spokesman Claude Walker said.

"The credit unions wouldn't be involved in making the decision to lend to individual borrowers," Walker said.

Still, administrators say, community colleges are by no means out of the water yet.

"I don't think we're out of this, but I think with the legislation and this action by the state of Illinois and frankly some other lenders coming in and picking up business, it's helped out," Dowling said.

Still, he said, "We only know what we know. I'm concerned about that first-generation student who didn't have the resources at home, did not know to pursue other options with their financial aid office and just gave up (after they were turned down by a lender). We don't know who they are."