US college students face big loan hikes

Many US students may be unable to take up their university places this year, as banks clamp down on credit in the midst of the economic downturn.

More than 80 US lenders, collectively responsible for 14 per cent of all private student loans, have stopped such provision. Others have placed tighter restrictions on borrowing. The decline in house prices also means parents have less property equity to borrow against, leaving students anxious about paying their tuition bills for the 2008-09 academic year.

The credit crunch forced Congress to step in last month to assure students and their families that loans will remain available through an emergency government programme, with the federal Government acting as the lender of last resort.

But despite the last-minute bail-out, some students are still expected to be denied credit, while for those who get loans, borrowing fees and interest payments are expected to be much higher in 2008-09.

There are concerns that many students, especially those from lower socioeconomic groups, will fail to take up their places in autumn, while others may switch to cheaper, shorter courses at community colleges.

Low consumer confidence has led to renewed questions about the high price of private higher education in the US, with the combined costs of tuition and other fees at leading private universities approaching the median US household income of $48,200 (£24,650).

"It won't necessarily be evident how bad it is until all the students have gone into the market to find loans ... and the bills start being sent out in July," said James H. Day of Hardwick Day, a consulting firm to private universities that specialises in financial aid and other issues.

Peter Mazareas, vice-chairman of the College Savings Foundation, said: "The most significant impact will be on middle-class and still-dependent students, simply because they need to borrow generally more than the federal loan programme provides.

"If they are able to find private loans, the qualifications have substantially increased, and the interest will substantially increase. It ultimately becomes an issue of class polarisation."

The US Education Department estimates that about 7 million borrowers will need more than $68 billion in federal loans for the next academic year.

But the legislation may not be sufficient to help cover the costs. Dr Mazareas said: "If students go to a public university, it will barely be enough. The problem is that when they get to private institutions, the gap between federal loans and the total of tuition pretty much necessitates private loans."

"This financing crisis is twofold. One part of it is the loans, but the other is the pricing," he said.

The credit crunch has exposed the fact that student loans are estimated to account for 40 per cent of private university revenue, said Mr Day.

"I don't think higher education understands the extent to which it is dependent on loan capital," he said. "Colleges have not internalised the fact that they have to establish a different kind of relationship with families in terms of financing affordability. Colleges are still in the mode of presenting the tuition bill and saying: 'Good luck.'"

"It's fairly evident that the pricing model we have in higher education is not sustainable. I think there will be pressure on colleges and universities to restrain themselves."

But with universities enjoying the highest number of applications since the baby boom, there is little incentive for them to make changes.

"Ultimately, it's the responsibility of consumers to put pressure on the colleges," Dr Mazareas said.

"However, that's not human nature. If your sons or daughters get into the college that they want to go to, you'll do whatever it takes to pay for it. There's this inherent market contradiction that students and families will continue to pay, no matter what the price."