A Shaky Season for Student Loans

Subprime woes and recent legislation have lenders tightening standards for applicants, and the credit crunch is eating away at other sources for tuition money

Shortly after New Year's Day, Pat Watkins, financial aid director at Eckerd College in St. Petersburg, Fla., placed a worried call to National Education, a student loan company she has been working with for nearly two decades. She had heard rumors that the company was no longer funding federal Stafford and PLUS (Parent Loans for Undergraduate Students) education loans, but had received no official word from the company.

She found out that the phone of National Education's local rep had been disconnected. Later she learned that Chicago-based National Education was not planning to accept applications for new loans for the spring semester after Jan. 15, though they planned to fund disbursements for students who received loans for the fall.

Federal Loans Lose Funders

That was the first surprise. In mid-January, Watkins received a letter from Phoenix loan company NextStudent saying they, too, would not be funding new Stafford or PLUS loans for the spring semester, only funding loans where there has been a fall disbursement.

At least one other student loan company, San Diego-based Goal Financial, has also pulled back their federal loan lending, according to college loan officials. Federal student loans are low-interest loans guaranteed by the federal government. Congress outsources many of these loans to private companies and has recently passed legislation that has eliminated many of the subsidies they gave these lenders to encourage them to participate and administer the federal loans.

"I haven't seen it this bad before," said Watkins, who has worked in the financial aid industry for 34 years. "I