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…

Lenders of student loans have been feeling the effects of the recent credit and housing crisis and it’s now starting to affect the students who borrow from them. The problem they are facing is that they are unable to raise money in the financial markets like they normally do. While the credit crisis is being felt in all financial areas, it will now be hitting hard on the college students seeking private student loans and loan consolidations.

Earlier this month, The Education Resources Institute Inc., a Boston nonprofit that guarantees student loans, filed for bankruptcy and left the more than 500 students without means to pay their tuition and bills. This is a growing trend with more than 50 firms having abandoned or cut back their federal or private student loan programs.

Loans are going to be harder to come by and more expensive for students and parents who are applying for financial aid and loans for the upcoming school year. In the past, families used to secure student loans almost regardless of their credit history.

From the Boston Globe, Credit Crisis Hits Students Borrowers:

Student loans have been among the easiest and cheapest loans to get - allowing millions of Americans to go to college as long as they promised to pay the bills after graduation. Given this year’s challenging environment, many colleges are offering more assistance to students, such as more generous grants and direct government-backed loans with capped interest rates, such as Stafford loans.

This month also saw some bad luck for customers of Citigroup, one of the largest private student loan lenders. Citigroup announced it would stop lending at some schools and end its federal loan consolidations. This is a big problem for students and graduates looking to save in interest payments by consolidating their student loans. Bank of America Corp., the third-largest student lender in the country, is also jumping ship by saying they will no longer be offering private student loans. Read more…