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Quick Hits: Student Lenders Dropping Out

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Brief scrutiny of today's headlines.

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Thousands of college students may not be able to attend class this fall as many private sector lenders withdraw from the student loan market.

About 10% of the nation's 9 million student borrowers supplement government aid programs with private loans, The Wall Street Journal reports.

Government grants have failed to match rising tuition in the last 10 years. Private loans have increased about ten fold to about $17.1 billion a year.

About two dozen lenders, including Bank of America (BAC), Citigroup (C) and Wachovia (WB), have halted or reduced private lending to students since the beginning of the last school year. Lenders pulled back on student loans as investors have shunned the securities they draw on to raise capital.

The pullback could leave as many as 200,000 students ineligible for private loans this fall.

The Massachusetts Educational Financing Authority, a non-profit organization, announced in July that it couldn't raise money for private loans. This forced about 32,000 students to seek funds elsewhere. The Michigan Higher Education Student Loan authority, another non-profit, stopped making certain private loans earlier this year.

Banks still making student loans have tightened standards, boosting the required FICO score about 100 points. FICO rates creditworthiness on a scale of 300 to 850. In the past, some banks have made private loans with a FICO score in the 600 range.

Increased availability of loans has boosted the number of students entering college after high school to about 66% in 2006 from less than 50% in 1980, the U.S. Department of Education reports.

Students at for-profit schools are among the hardest hit by the new lending standards. The schools often serve low-income students with lower credit ratings and higher default rates. Classes offered range from computer science to nursing.
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