Student-Loan Borrowers Face Credit Crunch

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The Associated Press

February 5, 2008 Tuesday 4:13 PM GMT Student-loan borrowers face credit crunch

BYLINE: By JANE J. KIM, The Wall Street Journal

SECTION: BUSINESS NEWS

LENGTH: 647 words

Despite the Federal Reserve's latest rate cuts, lenders are raising rates and fees on some student loans and making others harder to get. In recent months, average rates on private student loans have increased by about 0.5 percent to 1 percent, says Mark Kantrowitz, publisher of FinAid.org. Last month, for example, MRU Holdings Inc.'s MyRichUncle raised some rates on its private student loans, following College Loan Corp. and SLM Corp.'s Nellie Mae, which raised rates on their private student loans last year. SLM's Sallie Mae and First Marblehead Corp., another big provider of private student loans, told analysts that they expect to change the pricing on their private loans to reflect market conditions. Last week, First Marblehead told analysts that it was tightening its credit criteria to focus on "high-quality borrowers" and was "in the process of increasing fees and rates that borrowers will pay." Some borrowers, especially those with less-than-perfect credit, will likely have a harder time getting a government-backed federal loan, as lenders tighten up their standards and pare back their offerings in re- sponse to the credit crunch and recent legislation. Last week, for example, College Loan said it will no longer provide federal student loans, while Nelnet Inc. recently announced that it would stop offering so-called consolidation loans and be more selective in all of its other origination activity. Consolidation loans, which allow borrowers to combine all of their federal loans into one to lock in a fixed interest rate and simplify and reduce monthly payments, are the least lucra- tive student loans for lenders. Meanwhile, Sallie Mae citing higher levels of delinquencies and losses said it was tightening its credit standards and will cut back on private loans made to nontraditional schools and to borrowers with lower credit scores at schools with low graduation rates. The company also said it plans to reprice its private loans to reflect "market conditions," reduce borrower benefits and place less emphasis on its federal consolidation loans. While rates on federal student loans are set by the government, banks and other lending intermediaries are scaling back their borrower discounts and reinstating some of the fees they had previously waived. Citi- group Inc.'s Citibank unit, for example, recently began charging federal default fees of up to 1 percent of the loan's principal, depending on the guarantor, on its federal Stafford loans and a 1.5 percent origination fee; previously, it waived those fees. The moves stem from the fact that many lenders raise money to fund a wide array of consumer loans, in- cluding student loans, by selling pieces of that debt to other institutional investors, a process known as "se- curitization." But as fears over defaults in loans backed by mortgages continue to spread, investors have backed away from buying any type of securitized debt. Page 2

"If lenders want to securitize their debt, they have to pay more to get investors interested," says Mr. Kantrowitz. If they're unable to, they're forced to rely on credit warehousing facilities typically large unsecured loans from big international banks which are more expensive, he says. The higher costs, in turn, are being passed along to borrowers. There's one bright spot for borrowers who still have variable-rate federal student loans issued before July 1, 2006: The Federal Reserve's recent round of rate cuts should result in big interest-rate savings if they wait to consolidate. Borrowers who consolidate their loans on or after July 1 when interest rates on these loans reset could lock in rates of less than 4.25 percent and 5 percent on their government-backed Stafford and PLUS loans, respectively, says FinAid's Mr. Kantrowitz. That compares with a consolidation rate of 7.25 percent and 8.125 percent for most Stafford and PLUS loan borrowers, respectively.

LOAD-DATE: February 5, 2008

LANGUAGE: ENGLISH

PUBLICATION-TYPE: Newswire