Guaranteed private student loan

Lenders are shunning trade-school students, raising questions of equitable treatment

Since 1965, the federal government has helped millions of students pay for their schooling by guaranteeing loans made by private lenders. Some $53 billion in education loans to 24 million young people are outstanding. But now many lenders are pulling out of the student-loan business entirely, while some large banks such as Chase Manhattan are picking and choosing whom to lend to. In the process, they may be turning away some students who most need aid.

The banks say they are only being prudent, reacting to a government crackdown aimed at stemming the rise in defaults, expected to reach $1.9 billion this year. To place more loan-collection pressure on banks, the Department of Education has begun refusing to honor its guarantee if lenders don't hew to its detailed requirements. The most dramatic example came last March, when the Department of Education dropped its guarantee behind $1 billion worth of loans made mostly in California. Massive computer snafus had fouled up loan billing for months. Banks are squabbling over who pays for loan losses that could total $650 million.

But some education experts claim that an important public policy is also being trampled in the process. Making loans to students according to the type of school they attend is inimical to the guaranteed-loan program, which is based solely on financial need, says Richard Hawk, chairman of the Higher Education Assistance Foundation (HEAF), the largest of about 40 middlemen for the federal loan-guarantee program. "There is no social purpose in just guaranteeing loans to Harvard students," he argues. And if more lenders drop out, it could endanger the future of the program that provides the lion's share of financing for many students' postsecondary schooling.

Banks retreat. Banks such as Chase, the nation's second-largest student lender, say they have stopped lending to students at proprietary schools because the government guarantee on the loans might be threatened by their much higher default rate. Citibank, the largest such lender, in March tightened its credit standards, With some exceptions, it no longer approves loans to schools where the default rate is above 25 percent. The same reasoning led HEAF to stop doing business last summer in 18 states, in order to reduce the large proportion of trade-school loans on its books. HEAF loses a portion of its federal backing if its default rate is too high.

Students at proprietary trade and technical schools, who constitute 25 percent of all borrowers under the program, are the unwitting victims of the banks' pullback. Two major lenders to students at the Leone School of Technology in Cleveland have stopped making loans in recent months, reports coowner Lissa Taboh. When some banks back away from making loans to trade schools, others are swamped with more default-prone loans.

To be sure, banks cite other reasons for refusing to loan to tradeschool students. "[It is] inherently less profitable," says Stephen Iovino, president of Chase Manhattan's student-loan unit. That's because it costs as much to process and carry a $2,500 loan to a proprietary-school student as it does to make a $10,000 loan to an Ivy League student. And some proprietary schools aggravate the problem by luring unqualified students who later default on loans. Unfortunately, trade-school owners argue, legitimate institutions are paying for the less reputable schools' sins.

The current crunch began with wellintentioned efforts in the mid-'80s to curb the swelling rosters of deadbeats. Because of tuition hikes, borrowings had ballooned; so, too, had defaults. And when Congress lowered the income ceiling for those eligible for subsidized loans, cutting out many middle-income families that the program was originally designed to help, it also increased the proportion of tradeschool students, because they tend to come from low-income families. "Guaranteed student loans are now in essence a poverty program," says Senate Education Subcommittee aide Sarah Flanagan.

Lenders will shy away from the latest minefield unless solutions are found. Under one proposal made by trade school leaders, lenders would be required to lend to all needy students through risk-pooling arrangements analogous to those of the insurance industry. But some regulators and academics believe that a more thorough reform of the system for financing higher education is urgently needed. The guaranteed-loan program faces congressional reauthorization in 1991. How equitably it functions until then could determine whether the system gets a tuneup or a major overhaul.