Students could be subprime victims

EDINBURG - Oscar Garza is one thesis project and $2,200 away from a master's degree.

He's started the thesis, but the 26-year-old Edinburg resident still needs a student loan to pay for supplies and his final class at the University of Texas-Pan American. The loans also help pay for rent and other living expenses.

He and students like him are in jeopardy of falling victim to the nation's subprime mortgage meltdown.

Lenders - shaken by the mortgage collapse and worried their debts may be the next people can't pay because of their growing struggle to pay bills - are becoming more reluctant to give out student loans, even those backed by the federal government.

More than three-fourths of the UTPA student body receives financial aid, and $32 million in student loans are granted every year, said Bill Morley, assistant director of student financial aid services for the university.

The loans are critical as jobs across the country require employees with more education and knowledge of modern technology. If people can't afford more education they won't be able to take those higher-paying, skilled jobs and employers will have a harder time finding qualified employees.

Such a predicament would particularly hurt the Rio Grande Valley, where local colleges and universities are working with the business community to develop technology and employees for rapid response manufacturing, said Keith Patridge, president and CEO of the McAllen Economic Development Corp.

‘Perfect storm'
Banks or other primary lending institution dole out student loans and then sell those credit lines to secondary lenders.

The secondary lenders sell bonds on the capital market as bonds for subprime mortgages. When homeowners began defaulting on their mortgages in the past several years, the value of the bonds decreased and fewer investors bought them.

Worsening the matter, Congress limited the profit yield lenders can make off selling the loans, pushing primary lenders to consider suspending or ending their student loan programs altogether.

"We have a perfect storm," said Patricia Beard, chief executive officer of the South Texas Higher Education Authority, a non-profit organization that purchases loans from primary lenders.

Local universities and other observers say students and parents shouldn't worry too much, though - there are still many lenders willing to purchase federally guaranteed loans, as well as those directly offered by the federal government.

UTPA tries to give out as much gift aid, including scholarships and grants, to students before offering loans, Morely said. In fact, earlier this year, the university expanded its UTPAdvantage Program to provide a free, four-year ride to full-time students in good academic standing and whose families make $30,000 or less.

The university also has been approved to participate in the direct lending program, where students directly borrow money from the federal government.

"Rest assured, we're going to make sure student loans are still an option if you need them," Morley said.

Supply and demand
Attaining a higher education is becoming more difficult to keep, as tuition and living costs continue to rise.

Beard and David Guerra, president of International Bank of Commerce and the past chairman of the South Texas Higher Education Authority, said they're concerned the federal government might not be able to keep up with the demand for loans.

"Direct lending is key, but can it work?" asked Guerra.

The federal government handles 20 percent of the market in student loans and can only handle up to 40 percent, Beard said.

Almost all Texas colleges participate in the federal family education loan program. If those schools begin to participate in the direct loan program, along with other schools throughout the country, it literally will shut down or tie up the program, Beard said.

While legislation Congress passed last month and that President Bush signed two weeks ago helps families by raising loan limits and increasing Pell Grants, it doesn't address the capital market problem and lender yield problem, she said. So, local education leaders have been talking with the Valley's Congressional representatives to secure legislation that would make loans more available to students and parents.

Garza said he's optimistic he'll be able to receive a loan. But in the worst-case scenario, he'll apply from an emergency grant from UTPA.

He's hoping he won't have to use that option, though, because he would have to start paying that back within a couple of months of its receipt.