The credit crunch is going to school, forcing two upstate banks to drop out of a federal student loan program.
Changes in federal law and investors’ aversion for certain bonds have combined in recent months to eliminate many of the benefits banks reaped by participating in the Federal Family Education Loan program. That program includes Stafford student and Plus parent loans.
So far, 33 lenders have temporarily or permanently pulled out of the FFEL program, including M&T Bank in Buffalo and First Niagara Bank in Lockport. The London-based HSBC Bank is another big New York lender that dropped the program, according to FinAid.org.
Lenders’ retreat from FFEL means hundreds of students attending Capital Region colleges and universities will have to find new sources of financial aid. Although local financial aid experts say students will likely be able to secure new loans, it might take more time to do so.
At Union College, 10 percent or 109 of the undergraduate students who received Stafford or Plus loans for this school year got them from M&T. The Buffalo bank was one of nine major lenders the Schenectady college has worked with on financial aid issues, said Union Director of Financial Aid Linda Parker.
“The availability of the loan funding is not going to be an issue. Students are just going to have to change their lender,” Parker said.
During the 2006-2007 state fiscal year, the New York State Higher Education Service Corp. guaranteed $4.5 billion in FFEL loans. Students attending schools statewide can choose between over 100 FFEL originating lenders. HESC President James Ross last week sent letters assuring New York college administrators that his agency will continue guaranteeing and providing the federal loans “without interruption.”
“There’s still many choices for students and families,” said HESC spokesman Ronald Kermani.
Lenders last fall saw the profitability of their FFEL lending operations cut in half when the College Cost Reduction and Access Act took effect. The law eliminated $20 billion in subsidies lenders received to help them offer low-cost Stafford and Plus loans. Congress redirected that subsidy money toward increasing federal Pell grant student aid, cutting interest rates on subsidized Stafford loans and creating a student loan forgiveness program.
“The joke in the industry is Congress took away half of their profits and the [credit crunch] took away the other half,” said Mark Kantrowitz, the publisher of FinAid.org, a student financial aid information Web site.
Since the collapse of the subprime mortgage industry last summer, lenders have increasingly run into problems raising capital to support various lending activities. Amid Wall Street’s gyrations, investors have also shied away from certain bond markets, making it harder for lenders to sell student loan-backed securities.
“Right now, investors are pulling back financially and they don’t want to take on a lot of risks,” said M&T spokesman Kent Wissinger.
In 2006, M&T originated $200.3 million in FFEL loans. The bank will suspend its participation in the federal loan program April 1, though it will continue offering private college loans. Wissinger said the FFEL pullout “is more in line with our tradition of fiscal conservatism.”
“We’re not concerned about money drying out for students for educational loans … There may be a slowness in the process,” said Robert Shorb, the associate dean and director of student aid and family finance at Skidmore College in Saratoga Springs.
Shorb said only a small percentage the 1,300 Stafford and Plus borrowers at Skidmore will be affected by the recent FFEL lender pullouts. Many of the college’s FFEL loans are originated by the Adirondack Trust Company, Bank of America and CitiBank.