Sallie Mae halts loans to 'subprime' student borrowers
Ameet Sachdev - Chicago TribuneIssue date: 1/24/08 Section: News
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Sallie Mae, the nation's largest lender to college students, will no longer make private education loans to students who are higher credit risks, so-called subprime borrowers. Private student loans, which carry higher interest rates than federal loans, help bridge the gap between tuition costs and federal aid.
Sallie Mae's change will hurt for-profit education companies because they rely on students' access to private loans more than nonprofit colleges and universities, student-loan experts said. On Tuesday, a number of education stocks, including Hoffman Estates, Ill.-based Career Education Corp., experienced big sell-offs on fears that the schools could see a decline in enrollment.
But the news is not so bad for students, even those with poor credit, experts said.
"I think on a balance it's a good thing," said Robert Shireman, executive director of the Project on Student Debt, an initiative to raise awareness about excessive student debt. "It will drive colleges and students to look for better ways to finance college education that doesn't involve so much expense and risks for the students."
Some for-profit schools said Tuesday that they are exploring alternatives to help students finance their educations. Career Education, for instance, said it is considering funding subprime loans from its own cash flow.
Career Education runs campuses under the International Academy of Design & Technology, Gibbs, Sanford-Brown, American InterContinental University names as well as the Cooking and Hospitality Institute of Chicago.
Private loans have become a growing source of funds for students as tuition costs soar and federal aid cannot keep up. In 2006-2007, private loans made up 24 percent of total education loans, up from 6 percent a decade ago, according to the College Board.
As private loans grow, they have become a source of controversy because they are largely unregulated and aggressively marketed by lenders. Sallie Mae was hit with a federal lawsuit last month by two students who allege the company violated federal civil rights and lending laws by intentionally targeting higher priced loans to students attending schools with high minority population. One of the plaintiffs, Cathelyn Gregoire, said that Sallie Mae is charging her 13.25 percent interest on a $14,276 loan she received in 2003, according to the lawsuit. Gregoire, an African-American, attended the International Academy of Design & Technology in Tampa.
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