Problems in the student-loan market are especially hurting upper-middle-class families whose children won't go to the local community college, but are not quite up to snuff for the Ivy League.
The tight credit markets are making private student loans more costly and difficult to obtain, with several major lenders stepping out of the fray. Wachovia (WB) became the latest major bank to cut back on undergraduate loans last week. It follows Citigroup (C), which took similar steps earlier this year, along with Bank of America (BAC), JPMorgan Chase (JPM) , Student Loan Xpress (owned by CIT Group (CIT)) and a slew of others.
Kevin Walker, CEO of SimpleTuition.com, says the number of companies offering loans on the site has dropped dramatically to about 22 today from about 77 at this time last year. He says about 20% of those enrolling in higher education—or about 3 million students—seek out private loans to fill in the gaps left from scholarships and limited state and federal support.
Those who will be hit worst by the student-loan crunch will be students whose parents don't earn enough to pay the escalating cost of enrollment. The problem will be particularly acute for students entering schools that have high tuitions, but don't have large endowments to entice them to come."It's not everybody," says Walker, "but it's people who go to high-profile schools - great institutions that don't have the deep pockets that Princeton has."
Even before the credit markets began to tighten up last year, Walker says private student loans were made "almost exclusively" to prime borrowers. Students without cosigners, or those with cosigners whose credit scores were below 650 have always had a tough time getting approved.
"These loans were not subprime," Walker says.
But in today's market, regardless of how credit-worthy the borrower is, lenders and investors have little appetite for unsecured debt that has a 2-, 3- or 4-year lag in repayment. During that time economic conditions –and family finances—can change dramatically.