Some of the biggest banking institutions are bailing on the student loan industry, referring to it as “unprofitable” and “a risky investment.” The hardest hit are community college students. Some providers, such as Citibank, JPMorgan Chase and SunTrust, are cutting their lists of colleges (mainly community and less-selective four-year colleges) whose students they will provide loans to, making students turn to other sources for pay for their college tuition.

Report by the New York Times:

By splitting out community colleges and less-selective four-year institutions, some remaining lenders seem to be breaking the marketplace into tiers. Students attending elite, expensive, public and private four-year universities can expect loans to remain plentiful. The banks generally say these loans are bigger, more profitable and less risky, in part perhaps because the banks expect the universities’ graduates to earn more.

Lenders are keeping quiet on how many colleges they’ve dropped which makes it tricky to estimate how many students have been affected. Colleges who have higher default rates are more likely to be dropped. And since most lower-income students attend community and a easy-to-get-into four-year colleges, these schools are the ones being dropped in most cases. Read more…

If you need a loan for college, there is no question that federal loans are the way to go. The interest rates are low and fixed, fees are small and the government pays the interest for students while they are still in school and sometimes even after graduation if they become unemployed or face other economic hardships. Federal student loans are offered to all students, regardless of background, class or credit history. So it was a surprise to find out that some community college students cannot get any form of federal loans. Instead they are forced to go with more expensive private loans or find other alternatives to pay for their education.

While almost all four-year colleges and universities in the country participate in the federal loan program, a large number of community colleges do not. The students who attend these community college cannot get a federal student loan. As a result they are forced to resort to credit cards and costly private loans to fill the gaps in their finances.

So what’s the reason for not supporting federal loans? As summed up in an issue brief from The Project on Student Debt, colleges sometimes think that students should not borrow for a community college education to prevent student debt from ballooning for individuals. As the brief also points out, this is not realistic when students must still cope with the ever-growing costs of tuition and other costs. Even a bigger slap in the face is when colleges try to guide students to other, riskier borrowing options like private student loans. Read more…

From Yahoo! News: The Associated Press reported that last Saturday President Bush said the recent credit crisis is threatening the availability of student loans. His administration is doing what it can to help with emergency loans for new students for the upcoming fall semester but called to Congress for authority to do more.

Bush threw his support behind a House-passed bill that would grant the Education Department greater temporary authority to provide loans to students unable to secure ones from banks or other lenders. A similar measure by Sen. Edward M. Kennedy, D-Mass., is pending in the Senate. He has also told Congress to get the new legislation on his desk as soon as possible. With college students needing to secure loans for the fall semester, there is no time to waste.

Earlier this month the legislation passed the House in a 383 to 27 vote.

The House bill would raise limits on how much borrowers can receive under the federal program. It also tries to encourage parents to take out federal loans for their children’s education. The bill would allow parents to defer repayment of those loans until after their children leave school, which is currently not allowed.

The recent problem stems from dozens of lenders that have stopped making loans under the federal program that subsidizes and backs low-interest loans. Some students relying on private loans, which are not federally backed and can carry high interest rates, have had trouble getting those nonfederal loans due to those lenders. The lenders make up an estimated 13 percent of the student loan market. Read more…