Sallie Mae, the nation's largest student loan company, announced late last month that it would cut back loan programs to students at colleges with poor graduation rates. The company, which lost $1.6 billion last quarter, is also reviewing its underwriting criteria to keep loans out of the hands of students with poor credit.
In a letter sent to President Ruth Simmons and other college administrators across the country, new Sallie Mae Chief Financial Officer C.E. Andrews attributed the policy shift to "new legislation (that) has significantly reduced the margins of all lenders on federally guaranteed loans, and the tightening of world-wide credit markets," which is responsible for a "steep rise in borrowing costs for financial services companies."
Tom Joyce, Sallie Mae's vice president for corporate communications said no current borrowers would be affected by Sallie Mae's new policy.
"Going forward, we're just going to be more careful," he said.
Joyce said Sallie Mae's policy is still evolving, but non-standard private lending - part of Sallie Mae's private lending for lower-credit customers - will definitely cease. Andrews' letter said Sallie Mae has already informed certain schools that the company will no longer offer certain loan programs to the schools' students.
Sallie Mae singled out schools with low graduation rates because of the strong inverse correlation between graduation rates and loan defaults, Joyce said, adding that graduation rate is the "number one" indicator for whether a student will pay back his or her loan.
"Sixty-five percent of our defaulted loans came from dropouts or those students who reduced to less than half-time study," he said.
While all of Sallie Mae's federal loan programs will continue, Joyce said the private loan cutbacks could be good for low-income students at schools with poor graduation rates.
"The bottom line for us is that we want to lend money to people who are going to succeed," he said. "We want them to be in better shape rather than in worse shape - debt loads don't do a student any good."
Joyce said Sallie Mae is helping colleges through the transition process.
"We offer a great deal of borrower counseling products and services," he said. "Our hope is that there will be other sources" for students who no longer qualify for Sallie Mae assistance.
Tony Pals, a spokesman for the National Association of Independent Colleges and Universities, said that, though the decision makes sense from a business standpoint, "it's still disappointing for what it could do to good students at good institutions."
"Students who would be most affected will be those that attend lesser-known regional schools - often schools that more or less specialize in educating low-income students," Pals said.
To ease the burden on needy students, the NAICU is lobbying to raise federal funding for student aid. For the first half of this decade, there was no increased funding for some of the most important aid programs, Pals said. Twenty years ago, students generally received half of aid money from their private institution and half from the government. Today, schools provide five times as much aid as the government.
"Students need government to redouble their efforts to make up for lost ground," Pals said.
Harris Miller, president of the Career Colleges Association, said that Sallie Mae's cutbacks could also have a disproportionately large impact on the most needy students. "The cutbacks in student lending could have an adverse impact," he said. "They can't just go out and get a loan on their own. They need some support given their circumstances."
In the short term, Miller said, colleges will take on the loans themselves where they cannot find alternate lenders.
"They're very committed to their students, but they aren't bankers," he said. Some colleges with low graduation rates and smaller endowments will be hit the hardest, Miller added, as they won't have the means to replace the financial aid previously provided by Sallie Mae.
