Students at Corinthian Colleges and other for-profit learning institutions are getting a painful lesson in credit-crunch economics: Some lenders, including giant Sallie Mae, are turning off the money faucets for less credit-worthy applicants.
That means students at these commercial schools who use high-rate private loans to bridge gaps in their tuition costs or who fail to qualify for conventional loans and grants may have a harder time financing their educations.
It’s the latest blow for Santa Ana-based Corinthian Colleges Inc., which has nearly 68,000 students at 93 career training schools in 24 states and is one of the nation’s largest for-profit providers of post-secondary education. Corinthian’s problems are echoing through the commercial education industry, which has seen company values plummet in the last few months as investors fret that a lending squeeze could reduce enrollment.
Corinthian said Monday that Sallie Mae, the nickname for SLM Corp., would stop lending to current students who are considered high credit risks. The loans are a kind of funding of last resort for students, with interest rates as high as 19%.
Corinthian students who relied on private loans reacted with dismay even though their current loans wouldn’t be affected.
“I wouldn’t be able to come to this school without my loan. I don’t think this is a good idea,” said Valerie Barragan, 20, as she left the West Los Angeles campus of Everest College, one of 12 Southern California schools owned by Corinthian. Barragan, a single mother with a 10-month-old child, is studying to become a medical assistant.
Corinthian said last month that Sallie Mae and two other lenders, College Loan Corp. and Student Loan Express, wouldn’t make new private loans. Corinthian had assumed then that Sallie Mae would continue to offer loans to current students through the end of their educations.
Sallie Mae also cut off such loans to two other big for-profit education chains. They were Carmel, Ind.-based ITT Education Services Inc., which has 49,000 students in 93 schools in 34 states, and Career Education Corp. of Hoffman Estates, Ill., which has 90,000 students at 75 campuses in the U.S., Canada and Europe.
The change could be a particular problem for Corinthian because about 75% of the private loans to its students were of the sub-prime variety in fiscal 2007. Corinthian schools offer various programs in health, criminal justice, business, vehicle repair and maintenance, construction trades and information technology.
“There has been a squeeze on student loan lending, especially from these non-bank lenders,” said Mark Kantrowitz, president of MK Consulting Inc., publisher of the student aid information websites FinAid and EduPASS. “Corinthian has a disproportionate amount of low-income borrowers, which have a greater tendency to default.”
Investors brushed off the news, sending Corinthian’s shares up 40 cents over the last two days to $8.19. Analysts said shareholders were encouraged by the company’s assurance that Sallie Mae’s decision wouldn’t hurt earnings.
“We are confident we can arrange financing for the vast majority of incoming students,” Corinthian spokeswoman Anna Marie Dunlap said in a statement Tuesday. The company declined requests for further comment.
Some Wall Street analysts agreed that the credit squeeze was surmountable because other factors were helping Corinthian and other commercial educators.
“If the job market is good, these people can work. If it isn’t, they need to go back to school and get the skills necessary,” said BMO Capital Markets analyst Jeffrey M. Silber. “This should be a great time for this company in this period of economic uncertainty.”
Financial analysts said that some companies would be hit harder than others. The University of Phoenix, Strayer College and Capella University were expected to weather the change well because “they have very few sub-prime students. Their students are typically working adults. They have less exposure,” said Amy Junker of Robert C. Baird & Co.
On Tuesday, DeVry Inc. said it had selected six financial services companies to make loans to its students and that it hadn’t seen a “material impact” on enrollment.
“We are confident that these lenders not only provide superior products and services for our students, but also have the capacity to withstand the current credit and liquidity issues that are affecting some student-loan providers,” DeVry Chief Executive Daniel Hamburger said in a statement.
Lynne Baker, spokeswoman for Career Education Corp., said that the company was sticking with a plan outlined Thursday, when Chief Financial Officer Mike Graham said it intended to finance some student loans on its own.
Student aid expert Kantrowitz said that no student should accept a private loan without first exhausting every other option for federal aid or grants.
He described private loan rates as “better than credit card debt, but not by much.”
Other experts expressed similar concerns.
“These are low-income students, without a parent or other co-signor, borrowing more than they can borrow within the federal student-loan program,” said Robert Shireman, director of the Project on Student Debt.
“To ask a student to take a high-interest-rate loan, on top of federal loans, for an unknown possibility of a degree and a job is too much risk,” he said. “Students should consider both other financing options as well as other schools.”
These loans are often compared to credit card debt, with the additional unattractive feature of accumulating compound interest while the student is enrolled in school. The result: After a few years, the student’s debt can double.
Student loans are not dischargeable in bankruptcy, so this debt can haunt a former student for life.
Some lenders don’t want to finance some students at certain for-profit schools, Shireman said, because their graduation rates are poor and the graduates often have trouble getting work. That makes repayment prospects bleak.
Default rates at for-profit schools run about double the national average, according to the Department of Education. In 2005 -- the most recent year for which statistics are available -- the average default rate for commercial school students was 8.2% compared to 4.6% for students overall.
Community colleges offer classes that lead to the same degrees and job prospects as proprietary schools, Shireman said. But, community colleges cost a fraction as much.
Pasadena City College, for example, charges $628 annually in tuition and fees to in-state residents, according to the College Board, a service that tracks higher education costs nationwide. That gets students a wide range of education options, including two-year degrees in nursing and dental hygiene, among others, and general education requirements to transfer to four-year universities.
Those wanting a medical assistant’s degree from Everest’s campus in Colorado Springs, Colo., would pay $11,045 for eight months of study, a telephone representative said.
Barragan, the student at Everest in West L.A., took on an $8,000 loan at 8% interest for an eight-week medical assistant course.
At a bus stop Tuesday morning, she waited with three friends, each with a similar loan. The students said they knew that their loans were more costly than conventional financing, which they couldn’t get. They said they knew that repayment would be difficult on the $9 an hour or so they expected to earn if they got jobs.
But the loans meant opportunity. Barragan’s friends -- Daisy Garcia, 18, of Lennox; Anna Sandoval, 19, of Venice; and Stephanie Chavez, 19, of Culver City -- said they were getting 75% to 90% of what they needed to get and keep a job.
“If I didn’t have this,” Barragan said, “I’d just be sitting at home right now.”