Major commercial education companies are scrambling to ensure a steady stream of college-level students despite the credit squeeze, with some preparing to offer student loans themselves.
The move shows how dependent this sector of education is on student loans and how vulnerable the industry could become if credit woes continue to make it harder for lenders to raise capital.
Commercial colleges largely offer practical education in fields like business, computers, health care and culinary arts, often catering to low-income students and students already in the work place.
Seeking to reassure investors, Corinthian Colleges Inc., one of the nation’s largest chains, recently said it was exploring “alternatives to help students fund their educational programs,” including expanding its own lending program and finding new lenders.
The Career Education Corporation, another large chain, has announced a similar effort.
ITT Educational Services Inc. recently announced a deal with three major banks to preserve students loans through the rest of the year.
And Universal Technical Institute Inc., which offers programs in fields like automotive, diesel and motorcycle repair, said it could lose tuition revenue if students default on subprime loans from an outside lender. About 3 percent of the company’s revenue now comes from such loans.
The credit concerns come on top of other changes disrupting the student loan industry.
Congress has moved to reduce subsidy payments to student lenders making federally guaranteed loans. Investors have shown little interest in buying securities backed by student loans, leading a Michigan state agency to suspend a private loan program for students.
And loan companies — most particularly Sallie Mae, the nation’s largest student lender — are tightening standards for private loans for students who have poor credit or attend institutions with low graduation rates. Private loans are not guaranteed by the federal government and can carry rates as high as credit cards.
“It’s akin to death by a thousand cuts,” said Gary Santo, a managing director at Fitch Ratings in New York who follows the student loan business.
So far, problems have yet to be felt by most students. But some in the lending industry have begun to warn that there may be fewer borrowing options, even for traditional students, in the fall, at least for private loans, which students turn to when they have exhausted federal borrowing and grant aid.
Members of Congress in letters to the Bush administration Friday also raised concerns.
“A crisis is looming in which students and families may not have access to student loans,” said Ben Kiser, a spokesman for Nelnet, a large lender based in Lincoln, Neb.
Financial aid administrators at some nonprofit colleges countered that they see no imminent crisis and said not only that many companies offer federally backed loans but that the federal government is a lender itself, through its direct loan program.
They said lenders, which fought hard against changes in the student loan program, have been too quick to say cuts in subsidies will reduce availability of loans.
“They cried wolf a lot,” said Eileen K. O’Leary, assistant vice president for finance at Stonehill College in Easton, Mass., and a past chairwoman of the National Direct Student Loan Coalition, an alliance of colleges that participate in the direct loan program that was intended to make borrowing less costly by having the government provide loans directly to students.
“Will there be wholesale students not going to school?” she asked, “No, because federal money is still there.”
In some ways this should be a boom time for commercial colleges, with rising unemployment sending people back to school and falling interest rates translating, in theory, into cheaper student loans. But lenders, fearful of bad credit, are not cutting rates and have said they may not lend at all to students seen as high risks.
That makes commercial career colleges particularly vulnerable because they often draw low-income students with spotty education histories and they often charge considerably more than public two-year colleges.
“The for-profits typically have higher priced programs,” acknowledged Kimberly J. McWaters, president and chief executive of Universal Technical Institute.
The limits on federal borrowing mean students often must turn to private loans.
“We’ve got to be innovative and work together with students to give them access to cheaper money,” Ms. McWaters said. “Most of us have balance sheets that allow us to do so.”
Still, lending to students is a risk for commercial institutions because such a step exposes them to losses from defaults. While executives at the companies say they have the assets to back or make loans, they also acknowledge the risk.In a regulatory filing last month, Corinthian warned investors that “increasing the amount our new students pay in cash and instituting stricter underwriting guidelines may slow our rate of enrollment growth. In addition, expanding our own lending program and guaranteeing third-party lenders against default may increase bad debt from current levels and decrease liquidity.”
Investors are showing concerns about the sector. Since November shares of Career Education have fallen by about 50 percent, to close at $17.33 on Friday, when the company also announced that it was closing two colleges and seven campuses of its Gibbs division, including the Katharine Gibbs School in New York, after failing to find a buyer for those operations.
Shares of Corinthian, which traded for more than $17 in December, closed Friday at $7.72. Shares of ITT Educational closed at $70.85 Friday, but were more than $130 in November. Universal Technical Institute shares have fallen by about a third since November, closing Friday at $15.31.
Many commercial educational programs are privately held and have not disclosed the impact that tightened credit markets may have on their business or what steps they are taking to make sure that students continue to enroll.
“The publicly traded schools are actually the best of the bunch,” said Trace A. Urdan, senior research analyst at Signal Hill Capital Group, which does not own shares in companies covered by its research.
Not everyone believes that retrenchment in commercial education would be bad. “High-risk borrowers with low academic achievement who are pursuing post-secondary training should not go to expensive, low-quality proprietary schools,” said Michael Dannenberg, director for education policy at the New America Foundation in Washington. “They would be better off going to community colleges, which are lower cost and open enrollment, for the most part.”
Not all commercial institutions are equally at risk. Some charge tuition low enough that it can be covered just by federal loans and so will be better able to ride out a credit crunch. Capella University, for example, got less than 1 percent of its revenue from private loans in 2007; the University of Phoenix, one of the biggest players in the industry, gets just 4 percent.
“We are not really seeing any impact on our business,” said Stephen G. Shank, chief executive of Capella.
