Private student lenders have dropped like flies in the past few months, victims of the credit crisis – bad news for them, but also bad for students who suddenly can’t get loans and colleges who would like to keep tuition dollars flowing.

But there is a possible, albeit tricky, way to get loan providers back in the game: Simply put, private colleges and universities could pool funds together, amassing enough capital to kick-start private student lending again. Those schools would partner with a federally chartered bank – the bank makes the loans, the school backs the loans up.

That’s the plan of two partners in Pierce Atwood, a New England commercial law firm. The idea is fraught with potential pitfalls, both political and logistical, but it sparked some interest from student loan experts.

The colleges would have to solve a number of issues, such as how to get the needed capital and how to form their partnerships, said loan expert Mark Kantrowitz.

All Of The Above

They’d also need loan providers to facilitate the process, but, as Kantrowitz wryly put it: many loan providers were laid off this year, so there’s no shortage of able professionals available.

Still, he said, “It’s an intriguing idea.”

The lawyers behind the proposal, Richard Hackett and Matthew McIntyre, are pitching it to media outlets and meeting with student loan providers – who they declined to name – in the hopes of getting some traction.

“If somebody doesn’t do something, a lot of kids are not going to be able to go to school or go to the school they want to,” McIntyre said. “So we’re making a real serious push to get the word out.”

The problem is widespread, with the credit crisis shutting down new lending for 37 out of 60 private lenders in the past few months, and the remaining lenders are tightening their standards considerably.

Public money can only do so much to help: Students have a variety of federal loan sources, and federal loan limits went up recently, allowing more students to get the cash they need. But that often isn’t enough, McIntyre said, so they need private loans to fill in the gap.

Hackett noted a National Association of Independent College and Universities survey in which almost all colleges and universities that responded had students unable to secure a private loan for the academic year.

About half of those schools said that because of this, some students were taking time off or switching to part-time status. Other students had to take on extra jobs or were paying for their education with credit cards.

All According To Plan

In further detail, here’s how the plan would work, according to Hackett: A group of schools agree with a bank on the terms for a loan program. The schools would deal with the current credit and liquidity crisis by shouldering some of both burdens – credit support can be provided by limited default guarantees, and liquidity can be supported by school investment in the loan pool, for the short term, in proportion to loans made to the school’s students.

In the long term, the goal should be to create a large enough pool to securitize once the asset-backed securities market unlocks, he said. At all times, the bank would be the lender and owner of record for the loan, because both making and holding consumer loans is a highly regulated activity that schools should not undertake alone.

But the process of implementing this solution is far from easy or quick.

Hackett said selling the idea would take some time. You’d have to sell the plan to universities, who, he said, are “not terribly sophisticated financial participants in the marketplace,” and who have a number of interconnected factions, each with different aims, that would have to be convinced.

Sarah Flanagan, vice president for government relations with the National Association of Independent College and Universities, pointed out another major hurdle – politics. When universities try to facilitate student lending, regulators are often quick to accuse them of serving their own interests, such as in the case of New York Attorney General Andrew Cuomo’s lending investigations in 2007.

Cuomo investigated universities who allegedly took payments for steering students to certain lenders. Universities countered that such arrangements were perfectly legal and helpful to students, who rarely shop around for loans and would have been left in a morass of direct marketing from loan companies.

“[Hackett and McIntyre’s plan] is an interesting idea, but the reality is Cuomo investigation last year killed a lot of interesting ideas,” she said. Such actions might be hailed now, during the credit crisis, but good intentions are often forgotten in a few years, when liquidity problems ease – regulators and university constituents are often not good students of history. Universities, in response, have thrown up their hands in defeat, she said.

Steve Allocca, president of Texas-based Education Finance Partners, which loans to students for a number of New England schools, was more enthusiastic.

“It’s a great idea, it makes all the sense in the world,” he said.

His company is solely dedicated to private student loans, but stopped making new loans in August and now only services its current loans. His company had previously “kicked around” an idea like Hackett and McIntyre’s, but got discouraged by daunting liquidity issues.

The hard part, he said, would be getting banks away from their own problems long enough to do the work of forming these partnerships. In the current environment, that might be even tougher than getting schools on board.

“Banks are a little distracted right now,” he said.