The Housing Market's Credit Crisis Raises Worries in Higher Education

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Text: How the Credit Crunch Might Affect Higher Education

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By PAUL BASKEN and GOLDIE BLUMENSTYK

The tightening of the credit markets amid the meltdown in U.S. housing prices is nibbling at higher education.

Although the sense of crisis now rattling Wall Street and the mortgage industry hasn't reached the same fever pitch with students or colleges, the economic turmoil is beginning to make it tougher for some colleges to cover their day to day expenses, and for some student-loan companies to stay in business. Families may also have a harder time borrowing against their homes to pay for college.

For students, the key time frame could be the next six months. If credit markets loosen by July, the start of the student-lending season, effects from the mortgage crisis could be minimal. If not, those needing to borrow beyond the limits of government-subsidized loans — from $3,500 to $5,500 for undergraduates — may face higher rates and tougher terms of eligibility.

The picture for colleges is mixed. Some are finding they will have to pay a bit more when borrowing money on the bond market for new projects. Others that have invested their cash for short term needs in losing investments may need to borrow to cover expenditures.

For the most part, though, colleges are faring better than most borrowers because investors consider them a good credit risk. However, at institutions that rely heavily on tuition, particularly those in parts of the country like California where the mortgage meltdown is most severe, college leaders are becoming apprehensive about what may lie ahead.

"We know the mortgage crisis is hitting the community pretty hard," says Lynn Fox, director of financial aid at the private University of the Pacific. "You see it and you have to think, That's certainly going to affect some of our students and their families." The university, which depends on tuition for more than 80 percent of its budget, draws about six out of 10 of its its students from within 150 miles.

But even as some worry, others are finding opportunity.

In California, public and private colleges have begun to work together on a new program to provide affordable housing for faculty members, many of whom have been priced out of the market.

Spearheaded by the Association of Independent California Colleges and Universities, the new Faculty Housing program will acquire homes in foreclosure and unsold inventory from developments where sales have been slow, and make them available to professors at affordable prices.

Although exact procedures are still being worked out, Jonathan Brown, president of the association, said he expected at least six private universities and several public institutions to take part.

Costlier Private Loans

Most student borrowers rely primarily on government-subsidized loans, and the rates they pay are set by law. "They should be OK," even as the credit crisis swirls around them, says Mark J. Weadick, managing director at Citigroup. Under the federally backed program, known as FFEL, the government guarantees the repayment of defaulted loans.

Those relying on private loans to cover any gaps between the cost of college and the maximum amount they can borrow under the federally guaranteed program might have trouble if the crisis persists, Mr. Weadick said.

"They might be more expensive," he said of private loans, "and the credit terms might be tougher.

The rate of growth in private lending has been slowing. Private loan volume rose only 6 percent in the 2006-7 academic year, after growing at an annual rate of 27 percent for the preceding five years, according to an annual survey by the College Board. Still, for students, particularly graduate students who rely more heavily on private loans than do undergraduates, any rate increase is unwelcome news.

"I know a lot of people who are debating whether to continue in graduate school or drop out and get jobs because they're tired of all the debt and living in poverty," said Serge Egelman, a doctoral stduent in computer science at Carnegie Mellon University who serves as legislative-concerns chair for the National Association of Graduate-Professional Students. A spike in interest rates "might make the decision for them," he said.

Concern about the credit crisis hung over conferences held this month by the Consumer Bankers Association, which represents major lenders, and the Career College Association, which represents for-profit colleges.

"It's really a tough time," Jeff Noordhoek, president of Nelnet Inc., one of the nation's largest student-loan companies, told the career-college gathering. Investors who bought packages of student-loan debt have taken "such massive losses" that they won't continue to invest, he said.

Moody's Investors Service, a bond-rating agency, helped drive down the stock price of First Marblehead Corporation this month after Moody's warned that student-loan portfolios could be vulnerable to drops in the value of asset-backed securities. First Marblehead works with other banks to sell packages of student-loan debt to investors.

Congress in September approved the largest increase in federal student aid since the GI Bill, but lawmakers paid for the nearly $21-billion measure through cuts in the subsidies paid to lenders.

The bulk of the cuts came in the form of a 0.55-percentage-point reduction in the subsidy rate paid to for-profit lenders, such as Nelnet, that provide students with federally guaranteed loans. The subsidy rate for nonprofit lenders was cut by 0.40 percent.

"My prediction is that a significant portion of the players in our industry, the nonmajor players, are going to be forced out," Mr. Noordhoek told the representatives of for-profit colleges. "And that will have an impact on all of your students."

Picking Up the Slack

Others see a less dire situation, at least for now. Some smaller lenders could be hurt, said P. Gregory Stringer, senior vice president at Great Lakes Educational Loan Services Inc., a student-loan guarantor and servicer. However, he added, "What's going to happen is the other lenders are going to pick up the slack and make the loans."

It's even possible that the turmoil in the mortgage market created could help student-loan companies, by making their government-guaranteed assets seem even more desirable to investors, said Robert M. Shireman, founder and executive director of the Project on Student Debt.

"The credit crisis would tend to have either no impact or an opposite impact on federal loans because it's a very secure instrument," Mr. Shireman said. "It would tend to be the type of place that a scared investor would escape to."

Mr. Weadick told the bankers' conference that he agreed, having seen Citibank receive more requests for FFEL-backed financing in the previous two weeks than any other asset type. "Everything is impacted right now" by the mortgage-lending crisis, Mr. Weadick said, so there is a benefit of "flight to quality."

'A Flight to Quality'

The "flight to quality" is also having a buoying effect on colleges that are now borrowing money for new buildings or renovations by issuing bonds.

Investors who buy those bonds are becoming more attentive to the underlying creditworthiness of the parties that issue them, and colleges, as a whole, are considered good risks compared with other borrowers.

Interest rates for tax-free bonds are now hovering at about 4.75 percent, the lowest they have been in decades. While all colleges in the market are benefiting from that, with investors' new attention to credit quality, colleges with the strongest credit "are benefiting more," said John Augustine, a managing director at Lehman Brothers and head of its banking services for colleges..

The more lasting effect of the subprime credit crisis might be that some families are no longer able to afford their mortgages, and therefore are less able to help students pay for college, Mr. Shireman said.

That, he said, might be even harder to predict than the effects on banks.

A 2002 survey conducted by the National Center for Education Statistics found that 10 percent of parents had already remortgaged property or taken out a home-equity loan to prepare for college costs. More ominously, 14.8 percent of parents planned to do so.

"If the largest investment that your family has is your home, and you've lost 20 percent of the value, maybe that's enough to consider reconsidering the equation" of where you think your child can afford to go to college, said Mary Peloquin-Dodd, an analyst with Standard & Poor's. (Nationwide, housing prices have declined by about 5 percent from their high point, according to a study by economy.com, a Moody's publication. The study predicts they will decline a total of 12 percent to 15 percent before the market bottoms out in early 2009.)

John Nelson, a Moody's managing director for the college market, said he did not expect a major fallout, but to the degree that there is one, he said, "there might be some switching" from private colleges to less-expensive public ones. "Community colleges are going to thrive," he predicted.