SOURCE: NextStudent

June 12, 2008 13:40 ET

Undergraduates Left With Limited Student Loan Options as Large Lenders Drop Community Colleges

PHOENIX, AZ--(Marketwire - June 12, 2008) - As more than 6.2 million of the nation's community college students weigh their financial aid options this fall, some of the country's largest student loan lenders, including Citibank and JPMorgan Chase, announced that they will no longer be offering federal student loans to many community colleges, for-profit institutions, or other less competitive two- and four-year schools.

This news, combined with the recent finding by the Project on Student Debt that 25 percent of all community colleges in the United States do not offer federal student loans, points to trouble that may lie ahead as community college students encounter multiple roadblocks in trying to obtain the money they need to pay for school this fall.

When asked by The New York Times why they're no longer extending federal student loans to community colleges and other two-year schools, lenders cited a high risk of student loan default rates, along with fewer borrowers and small loan amounts at these schools that make the student loans there less profitable.

The lenders dispute accusations that the recent move discriminates against any specific type of institution, with SunTrust maintaining that its decision was "not based on any particular type of school" and Chase arguing that it isn't "cutting off any category of school" but simply tightening student loan credit standards in response to conditions in the current credit market.

Financial aid administrators at affected schools, however, are having a hard time seeing it that way. "There's been a certain amount of market segmentation going on, but this is the first time we've seen a lender, especially as large as Citibank, saying, 'We don't want to do business with you,'" said Samuel F. Collie, director of financial aid at Eastern Oregon University in La Grande, Ore.

With a lower cost of tuition than four-year universities and an accompanying typically smaller student debt load -- the average community college student carries $3,200 in student loans each year, according to the College Board, compared to an average of $5,400 for students at four-year public universities -- community colleges tend to attract lower-income and working students. The students most affected by lenders' decisions to no longer extend federal college loans to two-year schools, say critics, will be many of these disadvantaged students who demonstrate the most financial need.

Lenders are "staying in the program, but they're now determining which students they will and which students they will not lend to. And in my view, with a federally subsidized program, that's not OK," said Scott Roelke, president of the Minnesota Association of Financial Aid Administrators and the financial aid director for Dakota County Technical College, in an interview on Minnesota Public Radio.

According to California financial aid officials who spoke with The Times, Citibank had stopped issuing federal college loans at all community colleges in the state, citing low loan volume. Citibank's explanation is one that Korey Compaan, financial aid director for William Jessup University, fails to understand. "The logic is so flawed, that for us to have volume with them in the future, we have to have had volume with them in the past," Compaan said.

At Dutchess Community College in New York, which has been dropped by at least six lenders so far -- Chase, Citibank, Citizens Bank, M&T Bank, and Student Loan Xpress -- students now have even fewer options for federal college loans than students in the California community college system. "This is one of those perfect storm situations," said Susan L. Mead, director of financial aid.

Without ready access to low-cost, low-interest federal student loans to pay for school, lower-income students at affected two-year institutions may be forced to turn to high-interest credit cards, rely on more costly private student loans, or opt out of college altogether.

"We have our public two-year open enrollment institutions that are supposed to be serving the public and many times lower-income students," said Roelke. But now those very students "could effectively be frozen out of higher education."

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