Economic Woes Could Seep into the Student Loan Market

Current credit crunch has college lenders tightening standards

 

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With the annual cost of tuition and fees at a four-year private institution averaging $23,712, it’s no surprise that students sought more than $148 billion in financial aid during the 2006–2007 academic school year. However, funding for college may not be as readily available, as some low-cost federal student loan programs dry up and private student loans become harder to get.

Several lending companies that offer federal loans have recently backed out of the market because of the fallout from the subprime mortgage crisis. Some are backing out of the federal arena as a result of the College Cost Reduction and Access Act enacted in 2007, which lowers the profit lenders can make on federal loans and raises fees lenders must pay, says Harrison M. Wadsworth, a spokesman for the Consumer Bankers Association. The New York-based College Board and the College Loan Corp. of Poway, California, are among those who have left the federal loan program. The Pennsylvania Higher Education Assistance Agency temporarily suspended its lending activities through federally guaranteed student loans.

As a result of the credit crunch and tightening lending standards, “private lenders are redesigning their private loans,” says Haley Chitty, a spokesman for the National Association of Student Financial Aid Administrators (NASFAA). “Students will have to have better credit and be enrolled at institutions that are more reputable and have higher graduation rates. Students without good credit histories or no credit might have a problem accessing some private student loans.” While federal student loans such as Stafford and PLUS have lower interest rates and longer repayment terms, private student loans often cost more with lending institutions determining their own rates and credit requirements.

The shifting lending landscape means some college students may not qualify for private loans or will have to pay more for them, says Joaquin L. Thompson, author of My College Finance: A Guide to Understanding Personal Finance for Students and Parents. “With high-cost private loans, people can graduate from college and spend the remainder of their working days trying to pay off student loans,” Thompson says.

Despite growing concerns, the Department of Education maintains that there will be no federal loan shortage. “Federal student aid will continue to be available,” said U.S. Secretary of Education Margaret Spellings before Congress on Friday. However, Spellings said, the Department would monitor the situation to prepare for any “significant shift in loan volume” in future months.

Meanwhile, NASFAA is urging prospective college students to fill out their Free Application for Federal Student Aid as soon as possible, so financial aid officers can work with them to secure funding if other companies shift their loan policies. Also start looking for scholarships and grants, says Edith Bartley, director of government affairs for the United Negro College Fund.

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