College families scouring for loans

As bills come due, schools counsel calm; Funds still available - at higher rates

Walt Minnick, a financial aid counselor at Salem State College, was swamped with calls yesterday after one major lending authority announced it would make no student loans this year. (Essdras M Suarez/ Boston Globe)

With tuition bills looming, thousands of Massachusetts students and parents are scrambling to secure college loans amid deep turbulence in the nation's credit markets, but college and university officials are reassuring families they should be able to borrow the money they need.

Worried parents, facing payments that are due as soon as tomorrow, peppered financial aid offices across Massachusetts yesterday about the status of existing loans and the odds of obtaining new ones. In the latest in a series of wrenching changes to the student loan landscape, the Massachusetts Educational Financing Authority announced Monday it would not provide private loans for some 40,000 students this fall.

"A lot of phone calls," said Mary Benda, financial aid director at Salem State College. "A lot of questions and confusion, all day."

Given the timing of the authority's announcement, many colleges said they will be flexible about payment dates and late fees for parents who are pursuing other loans.

The uncertainty has compounded the concerns of many families over paying tuition costs in a slumping economy, and has complicated an already unwieldy financial aid system. Many parents had relied on private loans acquired through the nonprofit lending agency to supplement financial aid and federal student loans, but college officials said they are working closely with families to find alternative lenders.

College officials are quick to tell parents and students that government-backed programs, such as Stafford loans, remain widely available and that a wide range of options for additional private and federal loans remains, although probably at higher interest rates. Many schools are advising parents to replace private loans from MEFA with federal loans offered at a fixed 8.5 percent interest rate. Last year, MEFA offered loans at 6.39 percent interest.

"There are a lot of options for students and families," said Tony Erwin, director of financial aid services at Northeastern University. "But the terms aren't going to be as favorable. That's a result of the market shifting."

But some education officials said the timing of MEFA's withdrawal, just weeks before students return to campus, was bound to unsettle families.

"It's very discouraging to learn about this so late in the game," said Robert Antonucci, president of Fitchburg State College. "It creates an environment of panic, even though there are other options out there."

Numerous commercial lenders and state financing agencies stopped providing student loans this year because of a deepening credit shortage and reduced government subsidies that cut lenders' profits, loan specialists say.

MEFA announced this spring that it would not participate in the federal loan program, and had notified borrowers it was struggling to secure financing for private loans. With the start of the semester close at hand, the authority's decision Monday still caught many parents by surprise.

"All of a sudden you wake up and it's July 29. August is in three days," said James Steele, a father from Sandwich who is sending three children to school this fall and had previously relied on MEFA's fixed-rate private loans.

But many parents with no ties to the MEFA program also contacted colleges this week, concerned that the authority's announcement meant that other loans were threatened.

To ease their doubts, colleges e-mailed parents and students about alternatives and sought to reassure them that federal loans are not in doubt and that private funding remains available. Colleges also said they will be more lenient on deadlines.

"We don't have to have the money; we just have to have the approval" for a loan, said Susan Lanzillo, director of financial aid at Framingham State College.

Some institutions, such as Simmons College, had already grown skittish about MEFA's prospects and had not listed the authority among their recommended lenders.

Private loans accounted for 24 percent of all education loans last year, up from 6 percent a decade ago, according to the latest survey by the College Board. Private borrowing among undergraduates increased by 12 percent, when adjusted for inflation.

The departure of many major lenders from the student loan market will make it trickier for parents to find a substitute, especially with a tight deadline.

"This does come as a blow for students, especially so late in the game," said Justin Draeger of the National Association of Student Financial Aid Administrators. "There seem to be enough lenders in the game to pick up the slack, but private loans will likely be more difficult to get, and more expensive."

Hardly any of the private loans will have fixed rates; they will be variable, changing monthly or quarterly as the nation's interest rates rise and fall.

At Boston University yesterday, some students said the loan struggles amounted to a crash course in real-world finance.

"I think college students have to grow up a lot quicker because of the uncertain economy," said Jennifer Choi, a junior from Orange County in California who is applying for a loan from Sallie Mae, the nation's largest student lender, to pay for the upcoming semester. Balancing the paperwork with her job and classes, she said, has been daunting.

Financial aid executives and student loan specialists recommend that families first take advantage of fixed-rate federally backed loans.

"Make sure you've taken advantage of every free dollar you can. And max out your federal loans if you have to borrow," said Tom Joyce, a Sallie Mae spokesman.

Deciding what kind of loan to take out is much like choosing a mortgage, financial specialists said. There are interest rates, fees, penalties, and incentives - and mind-boggling fine print. The biggest question is whether borrowers are willing to gamble on a variable-rate loan.

Sallie Mae's best rate now on a private loan is 4.5 percent, for customers with the best credit ratings; rates can run as high as 13 percent. A search in bankrate.com for private student loans in Massachusetts turned up variable rates ranging from 7.8 percent to 9.8 percent.

If interest rates rise, payments could jump - causing the same kind of trouble homeowners have been grappling with as variable mortgage rates rose.

In tough economic times, officials said, students and their parents are cobbling together tuition payments from any number of grants and loans. At the University of Massachusetts at Boston, the number of students seeking financial aid has climbed by more than 1,200 from last year.

"It's impacting people that thought they'd be immune," said J. Keith Motley, chancellor.

Globe correspondents Angel Jennings and Anne Baker contributed to this report.