So far, financial aid administrators say they have been able to find fallback lenders that students can switch to, but the hurdles are costly to students — in money and time.
The maximum interest rate on federal loans, now at 6.8 percent on the most commonly used loans, is set by Congress, but lenders are scrapping benefits, like rate cuts for borrowers who make their payments on time or allow direct withdrawals from bank accounts.
Some loan companies have exited the student loan business entirely, viewing it as unprofitable in the current environment. By splitting out community colleges and less-selective four-year institutions, some remaining lenders seem to be breaking the marketplace into tiers.
Students attending elite, expensive, public and private four-year universities can expect loans to remain plentiful. The banks generally say these loans are bigger, more profitable and less risky, in part perhaps because the banks expect the universities’ graduates to earn more.
Lenders will not say how many colleges they have dropped, making it hard to determine just how many institutions have been affected.
Although financial aid administrators say the trend is widespread, they are often reluctant to identify which lenders have stopped serving their colleges, for fear that it will complicate matters for current students who have taken out loans from those lenders and still need to deal with them.
Michelle McClain, 40, who is studying to become a teacher, learned on Friday that she would have to find a new lender after Citibank dropped William Jessup University. The news angered her.
“The loan is between me and the lender,” Ms. McClain said. “I’m the one that’s taking out the loan, I’m the one whose credit is in jeopardy if I don’t pay it, I am the one totally responsible for the loan, and as long as I’m going to an accredited college, I don’t understand why it would make one iota of difference where I am going to college.”
The government has been taking additional steps to keep the student loan market operating smoothly. And some lenders’ doors remain wide open. Sallie Mae and Nelnet recently reaffirmed their commitment to federal loans regardless of the institution a student attends.
Kristin Shear, director of student financial services at Santa Rosa Junior College, said that days after the school was dropped by Citibank, Wells Fargo called to say it was eager to lend to students there.
The banks that are pulling out say their decisions are based on an analysis of which colleges have higher default rates, low numbers of borrowers and small loan amounts that make the business less profitable.
(The average amount borrowed by community college students is about $3,200 a year, according to the College Board.) Still, the cherry-picking strikes some as peculiar; after all, the government is guaranteeing 95 percent of the value of these loans.
Mark C. Rodgers, a spokesman for Citibank, which lends through its Student Loan Corporation unit, said the bank had “temporarily suspended lending at schools which tend to have loans with lower balances and shorter periods over which we earn interest. And, in general, we are suspending lending at certain schools where we anticipate processing minimal loan volume.”
Financial aid officials in California said that Citibank had stopped making loans to students at all community colleges in the state. Mr. Rodgers said the bank would not provide details about which schools were affected.
The financial aid director at William Jessup, Korey Compaan, said he did not understand the bank’s explanation. “The logic is so flawed, that for us to have volume with them in the future, we have to have had volume with them in the past,” Mr. Compaan said. Simply to cut off students at a college, he continued, “I find it totally and completely unethical.”
The government sets the criteria for college participation in federal loan programs, requiring that colleges be accredited and have low default rates to participate, for example. Now lenders are being more selective than the government.
“There’s been a certain amount of market segmentation going on, but this is the first time we’ve seen a lender, especially as large as Citibank, saying, ‘We don’t want to do business with you,’ ” said Samuel F. Collie, director of financial aid at Eastern Oregon University in La Grande, Ore.
“There’s a fundamental issue of fairness and equity that’s certainly not being addressed in this,” Mr. Collie said. “But short of completely revamping the way that financial aid, especially loans, is being delivered to students in this country, I don’t know that we have any easy answers.”
The credit crisis, which has made it harder for some lenders to raise money, and a reduction in the government’s subsidy to lenders have contributed to the reevaluations by the lenders. "This is one of those perfect storm situations,” said Susan L. Mead, director of financial aid at Dutchess Community College in New York.
She said her institution had been dropped by no less than six lenders: HSBC , Citibank, M&T, Chase, Citizens Bank and Student Loan Xpress.
Christine Holevas, a spokeswoman for Chase, said that the bank considered several factors in deciding whether to lend to a particular college’s students. “The repayment rate, you look at the size and length of the loan,” she said.