University Times

Unease in the nation’s credit markets has impacted colleges and universities on several fronts. Some student borrowers are concerned about the availability of loans. University administrators have had their own worries as schools whose debt is in variable-rate instruments found rates rapidly rising.

A report in the March 6 Chronicle of Higher Education noted that a number of colleges have been hurrying to restructure their variable-rate debt in the face of skyrocketing interest payments.

Pitt administrators say the situation has had minimal effect here.

Vice Chancellor for Budget and Controller Art Ramicone said Pitt doesn’t have the variable auction-rate notes that caused some institutions, including UPMC, to scramble. The medical center quickly made plans to redeem millions of dollars in debt after fluctuating interest rates on some of it rose earlier this year from 3.5 percent to more than 17 percent at auction.

“To date Pitt has not had any issues. I can’t say we foresee them,” Ramicone said.

In 2000, Pitt began swapping its debt from floating to low fixed rates over six years “when it made sense in the marketplace financially,” Ramicone said. (An interest rate swap is an agreement in which one party agrees to pay a fixed interest rate in exchange for receiving an adjustable rate from another party.)

Pitt has some market exposure because the underlying debt resets weekly, but Ramicone said that would become an issue for the University only if nobody wanted to buy Pitt’s debt securities. He added that they have been trading at reasonable rates and he has no reason to believe that will not continue. Pitt’s Aa2 Moody’s rating places it among high quality, very low credit risk borrowers.

Pitt’s debt is not insured, Ramicone said. Rather it is backed by the “full faith and credit of the University.” In cases where some other institutions’ debt was backed by bond companies, when the bond companies were downgraded, it resulted in a strange response from the market — buyers had been willing to hold the debt at 3 percent rates, but became unwilling to touch it at rates that shot into the double digits.

Ramicone noted the market response was “not rational,” adding that the buyers apparently got sidelined by the bond companies and forgot about the solidly rated hospitals, universities or transit authorities that initially issued the debt.

Reaction to the Pennsylvania Higher Education Assistance Agency’s announcement in February that it temporarily was ceasing to participate as a lender for federal student loans prompted PHEAA to post a “don’t panic” message on its web site to clarify that it is not going out of business and that student loans will remain available.

Its explanation states, in part, “Issues in the markets related to the sub-prime mortgage mess everyone is talking about have made it difficult for PHEAA to raise the cash it needs to fund student loans. Other banks and institutions who don’t have this problem will continue to work with PHEAA to ensure students and families have access to the money they need to pay for their education.”

Nervousness among lenders that has trickled down to worry borrowers moved federal lawmakers to hold hearings and urge the U.S. Secretary of Education to be proactive in averting any difficulties for student loan borrowers.

Secretary Margaret Spellings, in testimony March 14 before the U.S. House committee on education and labor, assured lawmakers that federal loans will continue to be available and confirmed that disruptions in the private loan market have not affected federal student loans.

In March, 315 member institutions responded to a poll by the National Association of Independent Colleges and Universities. The poll found that while 13 percent reported no changes in the availability of student loans from private lenders, 45 percent said their private loan providers were tightening credit requirements and 43 percent said some lenders were leaving the market. Thirty percent reported lenders were reducing borrower benefits and 20 percent reported higher interest rates on private loans for the coming academic year.

Suzanne McColloch, the University’s assistant director of Admissions and Financial Aid, said she has seen no problems with students seeking federal Stafford loans, noting that a number of lenders participate in the program. “We’re on very solid ground here,” she said. The University processes about 15,000 Stafford loan applications each year. “We have always been able to find a borrowing opportunity for families who want one,” she said.

She acknowledged that would-be borrowers with questionable credit might have a tougher time getting loans now, noting that similar results could be expected when any commercial loan market tightens. Marginal borrowers might pay more to borrow or find themselves subject to more intensive credit checks.

McColloch said the issues in the private loan market are less problematic in general for undergraduates compared with students in graduate programs such as law or medicine, where students tend to rely more heavily on non-government sources for student loans.

In the dental school, for example, students can finish with some $200,000 in debt. There, staff in the student aid office have received word from some private lenders that they temporarily are pulling out of the market for the 2008-09 school year.

The impact for students remains unclear because financial aid is not processed until summer.

However, dental school financial aid administrator Patricia Freker said she thinks the issue for students may be more a matter of inconvenience for those students who find they need to change lenders in order to get additional loans, rather than an outright inability to get loans.

Likewise, Meme Jeffries of the law school’s financial aid office said students there won’t be applying for financial aid for the upcoming school year until June or July. Plenty of federal lenders remain in spite of the departure of some from the market, she said.

—Kimberly K. Barlow