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Student Loan Trouble Hits Home

The nation’s subprime mortgage crisis and its trickle-down effect on student loans recently stunned Buffalo State and other local colleges when HSBC Bank USA and M&T Bank Corporation announced they will no longer provide federally guaranteed student loans. The move strips Buffalo State of its top two lenders, which together accounted for 44 percent of overall loan volume.

It’s a headache for us,” Kent McGowan, director of financial aid, recently told the San Francisco Chronicle, but, he said, there are more than 100 lenders providing loans to Buffalo State students. Many, like Citibank and Sallie Mae, are national entities that provide secure funding and are more accustomed to managing student loans. Nevertheless, McGowan said, the situation creates unwelcome extra work for students and his office.

“[Some] students will have to start the process from scratch next [academic] year,” he said. “They could have loan payments to two different lenders, unless they consolidate their loans or the two companies sell to the same buyer on the secondary market.”

McGowan also said that despite his office’s best efforts to help students and directly notify all affected, some factors will be beyond the school’s control. Federal guarantee agencies, for example, must have their systems ready to identify these students and to approve the second lender in order to disburse funds.

Similar bad news earlier this year actually prepared the Financial Aid Office to better manage the current situation, as First Niagara Financial Group (the No. 6 lender) and College Loan Corporation (No. 11) stopped offering federally guaranteed student loans.

“When Congress passed the College Cost Reduction and Access Act last summer, it cut subsidies in half,” McGowan said. With financial markets in turmoil and an increased risk with purchasing securities, he added, student loans began to take a toll on banks. “I think banks like HSBC and M&T provided the service because it’s what their existing customers asked for,” he said. “But push came to shove, and the banks couldn’t maintain the service.”

According to McGowan, students need to be wary of two dangers: predatory lenders and alternative loans.

Because of a recent code of ethics law set in motion by New York State Attorney General Andrew Cuomo, colleges may not offer a preferred lenders list without complying with lengthy regulations, even if their choices are in students’ best interest.

“This opens up the door to unscrupulous lenders who will not provide adequate levels of service and who try to sell the students higher-cost alternative loans,” said McGowan. “An alternative loan is not backed by the government like a Stafford loan—it’s one of the worst kinds of loans.

“In addition, the criteria to get alternative loans are more stringent, and it could lead to fewer people attending college [due to the lack of financial resources],” continued McGowan. “Five or six years ago, we saw maybe about $100,000 in alternative loans, and today it’s closer to $4 million.”

McGowan calls it an “unusual situation” to have two large regional banks—both of whom were a popular choice among students—drop out of the student loan business at the same time. He added that because even alternative loans are becoming harder to get, Buffalo State faculty and staff can help retain good students by contributing to the college’s scholarship endowment or financial assistance programs such as the Bridge the Gap Scholarship fund.

Despite the circumstances and the fact that there are dozens of other available lenders, McGowan warns that the crisis is far from over and thinks other corporations will also stop providing student loans. And the buck doesn’t stop there.

“Any kind of school-agency money agreement is getting intense scrutiny now from the attorney general [because of the economy],” he said. “From student loans to study-abroad programs to athletic booster clubs—everything is fair game.”