Colleges turn to U.S. loan program as credit tightens

College students have lost access to more than $6.7 billion a year in education loans after private lenders fled the market, spurring such schools as Pennsylvania State and Northeastern universities to turn to the Education Department’s Direct Loan Program.

Dozens of lenders, led by College Loan Corp. and CIT Group Inc., have stopped making federally guaranteed loans because the U.S. cut subsidies and investors hurt by the sub-prime-mortgage crisis shunned bonds backed by student loans.

Separately, JPMorgan Chase & Co., a major student loan provider, said Wednesday in a memo obtained by Reuters that as of May 1 it would temporarily halt its federal student consolidation loan business.

JPMorgan cited “tremendous volatility in the student loan market” and said it would continue to offer both federal and private loans to current and incoming students. Consolidation loans are primarily for students who already have graduated.

Since Feb. 28, at least 178 schools have applied to let students borrow from the government’s direct program, compared with 80 that applied for the program in all of last year.

Students took out about $68.2 billion in new U.S.-backed loans this academic year, according to Mark Kantrowitz, the publisher of FinAid.org, a scholarship and loan information website.