College loans in crisis

Staff Writer
Columbus Parent

As Otterbein College gears up to handle student-loan requests for next school year, its financial-aid office is seeing a disturbing trend: a growing list of companies exiting the student-loan business. Since the start of the year, the Westerville college has lost two of the 10 private lenders that provided most of its students with loans, including the College Loan Corp., the eighth-largest originator of federally guaranteed student loans.

Just as a string of mortgage originators have ceased making home loans in the midst of a national credit crunch, college administrators are warily watching the private student-loan industry, fearing it might be the next victim.

The problems stem from Congress reducing the subsidy on guaranteed student loans, making them less profitable. That means less investment money is flowing into the securities that fund student loans.

Take, for example, KnowledgeFunding Ohio. The nonprofit student-loan organization was hit this year by disruptions in the auction-rate bond market, temporarily forcing up the interest it pays some of its bond-holders to 14 percent, from 3 percent.

The organization has been unable to restructure $440 million worth of auction-rate bonds. In the case of KnowledgeFunding, the bonds' interest rates are reset by auction every 35 days.

The organization currently pays about 5 percent to bond-holders. In this environment, raising more money to fund new loans next school year looks to be out of the question, said Donald Kohne, managing director.

"Right now, we can't make any student loans," Kohne said. "Money is the product, and if we don't have a product, we can't sell it."

The situation has gained attention from the federal House and Senate education committees, whose chairmen recently warned the Bush administration to prepare for a student-loan crisis.

Though many universities, including Ohio State, tap loans for their students directly from the federal Department of Education, most colleges rely on private lenders.