Higher Education Policy and Practice

Sub-Prime Credit Crunch Poised to Hit Colleges

Daily news articles are reporting that the sub-prime loan debacle will hit higher education this fall. State lenders, major national lenders like Sallie Mae, and colleges and universities are reporting that they cannot get investors to buy their sub-prime loan packages. In almost every case, where equity loans are not used, students or parents loans for education are sub-prime. No one will buy them because there is no collateral to support the default and give the lender recourse.

Should colleges and universities even care?

Yes! The reason is that many institutions are vulnerable because most non-governmental loans are sub-prime. If students are unable to find some means of borrowing money, they may have to either forsake college or find a cheaper alternative such as community college. This could prove disastrous to enrollment and budget plans. Depending on the wealth of the families of new or continuing students, colleges could face a dramatic hit to their bottom line.

So what should presidents, chief financial officers, financial aid officers, and admissions officers do?

  1. Find out the level of vulnerability that you face. Ask the financial aid officer to tabulate:
    • The number of continuing students who receive sub-prime or non-governmentally backed loans;
    • The total, average, and standard deviation of the value of these loans;
    • The number of new students who may have to borrow money to complete their financial package before matriculation.
  2. Have the financial aid office prepare a list of the names, addresses, email addresses, and phone numbers of these students – both new and continuing.
  3. Have the chief financial aid officer meet with local lenders or other lending agencies to see what can be done to package financing for these students if the crunch hits.
  4. Prepare information packages for each student that sets a deadline to cover the balance of their financial obligations to the institution.
  5. Set-up a calling team to personally contact each person and arrange to get them to apply for money immediately.

This crisis may never happen, but it is best to prepare a response now rather than later. If the crunch does arrive with the start of classes and no action was taken earlier, colleges may find that the usual challenges of starting the fall semester are the least of their problems.

Originally posted March 16, 2008

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