Credit crunch takes toll on student loans

Just when overseas MBA students thought it was practical to consider returning to US business schools, the credit crunch has begun to hit them hard. Aspiring overseas MBAs who plan to enrol on US programmes later this year are now facing real difficulties in securing the loans they need to study in the country.

In the intensely complicated US loans market, a large number of lenders have gone bust. On the website run by the National Association of Student Financial Aid Administrators (Nasfaa), at least 50 lenders had suspended their loan schemes by the end of June.

The University of Chicago told graduate students on July 2 that its lending partner was unable to renew its line of credit owing to disruptions in the capital markets and the university was no longer able to provide loans to students.

For those lenders continuing to operate, the credit squeeze means that costs are rising.

“The cost of capital has gone up for everyone,” says Rose Martinelli, associate dean for student recruitment and admissions at Chicago. “It’s really pricey.”

With many people in the US out of work, lenders are concerned that students and recent graduates may default on loans in the short term, which compounds their costs.

The cost of loan repayment is particularly high for students from outside the US who apply for loans from US institutions. This is because credit references are not required and also the lenders find it harder to track down students on graduation if they return to their home countries.

International students can expect to pay interest of about 7 per cent on their loans compared with about 4.5 per cent for domestic students in the US. MBA students need to budget for costs of about $150,000 to complete their programmes.

Judith Hodara, senior associate director on the admissions committee at the Wharton school at the University of Pennsylvania, says about 87 per cent of the 900 students who enrol there every year require some sort of loan.

“We’re encouraging them to be exceedingly careful about where they apply [for loans],” she says.

That said, the admissions teams at both Wharton and Chicago are confident that all accepted students will be able to sort out their finances before they enrol and that no students will drop out of the programme as a result.

And, as Ms Martinelli points out, the extra cost of securing a loan is unlikely to deter those who can expect salaries in excess of $100,000 on graduation.

But, for students at lower-ranked schools, a loan may be more of a problem.