Loan crisis: how the credit crunch has hit postgraduates

One morning last week, nine months into my PhD, I discovered by accident that the loan which made my degree feasible, and which I had taken out for a year, was no longer available after that. I'd been looking into transferring to a university that might better match the evolution of my PhD in English and I mentioned to their fees office that my PhD has full funding from Sallie Mae UK. "Oh, those loans were ceased, we got an email," came the casual reply. "Can you self-fund?"

I rushed to phone my own university's financial office for enlightenment. "Yes, well, that is a problem," came the reply.

How would I pay my tuition fees and living costs in September and in the years to follow? I'd borrowed for the first year and was expecting to fund myself through the remaining years in the same way. How would I cover those without help? Though older than the average student, my financial circumstances weren't much better, and I would be no more able to shoulder the full outlay for a PhD than students at the beginning of their first career.

I confirmed with the lender that the scheme, which had enabled me to embark on academia's toughest challenge, had been terminated more than three months earlier. Sallie Mae, a major American lender that set up in Britain just two years ago, had not told borrowers that they were no longer lending in Britain to postgraduates. Nor was there any warning from Royal Holloway, the University of London college responsible for certifying my annual costs and delivering semi-annual cheques. The financial office explained that they're overloaded with student crises and had trusted Sallie Mae to inform its borrowers.

Of the universities I questioned, I found only one had sought to alert Sallie Mae-funded students that anything untoward had occurred. Sallie Mae UK loans still feature prominently on British university websites, though all 130 universities registered with the scheme received the lender's 28 February email announcing the loan scheme had ended "effective immediately", owing to the US credit crisis.

I phoned the British Office of Fair Trading who had licensed Sallie Mae to operate in Britain. The loan papers said so. I pointed out that the loans had been advertised as available for the whole of a degree's costs. The OFT official suggested that if there was evidence of mis-selling it could be emailed to an enquiries address.

I went to the Sallie Mae website and found a statement announcing the end of the UK loans scheme, but the pages that described the loans had been deleted. With the wonders of the "historical internet", I've now saved on my hard drive the original web pages that highlighted the key features: "Cover the full cost of your university education... Multiple-year funding available for up to the entire cost of your education". (The scheme, however, limited you to borow for one year at a time.)

This evidence will make its way to OFT enquiries, but meanwhile a lawyer has advised me that the OFT might choose not to act even if presented with evidence of mis-selling – but the class of borrowers who have suffered can make a claim.

Hundreds of students have incurred debts of up £20,000. So students already saddled with debt may have to abandon their degrees partway through and begin repaying their borrowings with interest to Sallie Mae unless they can find alternative funding. The unsubsidised interest rates applicable are as much as certain credit cards. University funding offices agree the situation is unprecedented, yet their inaction has been partly responsible for keeping hundreds of affected students in the dark.

How did a situation arise where British postgraduate education is funded from America? Sean McNally, fees manager at the London School of Economics, a few years ago suggested there was a need for US-style finance here and the Sallie Mae executives he spoke to listened closely. UK government grants and loans are only available to undergraduates. Career Development Loans are limited to 'vocational' courses lasting no more than two years, and are capped at £8,000. Postgraduate scholarships and studentships from the universities are very few and far between. While students in high paid professions like medicine and law can secure UK bank loans, most postgraduates may apply only to the government-backed research councils for support. These bodies have only enough funds for a small minority of applicants.

The Sallie Mae UK scheme was attractive because it required no past income to be shown and no collateral; it funded costs of living plus tuition fees for multi-year degrees; it allowed 15 to 30-year repayment periods. The loans were widely welcomed as a breakthrough for UK higher education.

Why haven't universities publicised the closing down of Sallie Mae UK? A university fees specialist suggested there's fear that bad news could 'spook' future students. After all, Sallie Mae's record is unsurpassed. Set up by the US federal government four decades ago, privatised in 2004, now a Fortune 500 company – if such an organisation can suddenly withdraw a scheme, how can postgraduates plan long-term? LSE's McNally points out that Sallie Mae's withdrawal from the UK has discouraged another lender who had been poised to enter the British student loan market.

"We never imagined it could be cancelled a year after it started," says Iain Summers-Noble, chairman of NAMMA, the university financial advisors association. "There was no warning label 'it may only last one year'. This is drastic for the PhD students affected."

Duncan-Philip Connors, President of the National Postgraduate Committee, says: "A company providing loans should have three to four years binding commitments to student costs."

Bill Rammell, higher education minister, did not reply to a request for comment. Lynn Ross, Sallie Mae vice-president for international lending, apologizes for the predicament in which students find themselves. "Our hearts go out to you," she says.

Sallie Mae has 700 UK borrowers on its books but all but two of its UK staff have been sacked, she says. As to why Sallie Mae didn't notify students, Ross said the corporations' legal advisers told them they didn't need to.

The universities were emailed so they wouldn't send in more applications. Sallie Mae's UK focus is now on selling its 'British debt portfolio'. No buyer has come forward. As for the annual loan payments students in the middle of degrees have been counting on, these are no longer the company's concern. Ross confided that after 25 years with Sallie Mae she herself will be out of a job in a couple of months. She would love to be taken on to launch a new UK loan programme should another lender materialise, she says with a laugh. "I'm just here now to turn out the lights."

As for my future, it looks like I will not have a Dr before my name and I'll have to put my aim of teaching university students to write fiction on hold. I'm pushing on with my novel about elitism and intelligence in America and going back to my film-making career.

The writer has written and directed a range of award-winning films. The British Film Institute will release a Special Re-mastered DVD Edition of his feature documentary 'The Animals Film' this September