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The Student Credit Squeeze Percolates Up

June 03, 2008 By John Fitzgerald, Education Policy Fellow

The nation's biggest banks are putting the squeeze on students at small colleges. This policy may cut off higher education access to students who need it most.

Lenders such as SunTrust, Chase, JPMorgan and Citibank say students at community colleges and trade schools have higher default rates and require smaller, less profitable loans. The lenders face heavy losses because of the home mortgage crisis and are making up those losses by cutting service to less profitable businesses.

More than 40 percent of the nation's high school graduates - or 6.2 million - attend community colleges. About one-third of those students took out an average of $3,200 in loans to pay tuition. As many as 50 percent of community college students use the schools as stepping stones to a four-year university while others use the schools to adjust their job prospects in a bleak economy.

Jason Damberg, a student at Inver Hills Community College, is studying to be a paralegal and will graduate this year. He is carrying about $5,800 in student loans. He is 35 and decided to change careers when his employer, a home painting company, fired its employees because of the depressed construction market. The college has been instrumental in helping him change careers.

An entry-level salary for paralegals is about $35,000. If he can get a job, Damberg said he will have no problem paying off his loans. Most of the loans are to Bremer Bank of St. Paul.

For its part, Bremer said a changing marketplace is forcing it to cut back the student loans it awards. Loans are now awarded based on the number of clients serviced by the area Bremer bank, not by the size or type of the education institution.

It is because students like Damberg can get jobs and pay off their small loans that banks such as Bremer want to stop lending to those students. A student leaves a four-year college with an average debt of $30,000 which is much more profitable to banks than the $3,200 average from community college students.

In addition, many students take general education classes required for a four-year degree at a two-year college rather than pay greater tuition at a four-year college. Damberg estimates at least 50 percent of community college students plan to transfer to four-year colleges.

Michael Uran, the Director of Financial Aid at St. Cloud State University, said about 35 percent of SCSU's 17,000 students transfer from other colleges. Uran didn't know how many of those transfers were from community colleges.

"If the route to student credit tightens, there will be a real impact on SCSU," he said.

Student credit won't tighten in Minnesota yet. Melinda Voss, spokesperson for Minnesota State Colleges and Universities, said students can still get loans even though large loan companies have pulled out of the small-market student loan business. "We have other loan vendors so we still can offer students access to loans," she said.

Loans will get more expensive, however. While the government sets the interest rate for student loans, fewer competitors means lenders can raise fees paid by the borrower. Students who can't afford the increased fees won't get the loans and won't go to college.

It's troubling, Voss said. "Anything that moves opposite of the direction of full access to school is not good for our students," she said.

Smaller schools have avoided the credit problem. Bill Buysee, president of the Allure School of Cosmetology in Red Wing, said the school is not accredited to receive federal programs such as the Stafford Federal Student Loan and the Pell Grant.

"We don't even qualify for the loans that the big lenders are backing away from," he said.

Meanwhile, Damberg has two classes and an internship to complete and then he's hoping for a paralegal job that starts at about $35,000. "Being able to get a loan and go to a community college is the only way I could afford to get a degree like this."

Damberg is right. The most effective route to career advancement is through education, and as Voss said, anything that goes against that simple truth is not good for Minnesota students. Loans to students attending community colleges should be as available from a variety of vendors as loans to any other educational institution.
 

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