Good News For College Loans

President Bush signs law increasing access to federal funds

 

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If you’re the parent of a college student, you know how expensive higher education
can be. For many families, the only way to pay the bills is to borrow money. Millions of students need billions of dollars in loans each year.

In recent months, there have been news reports that obtaining loans is likely to become even more difficult for the 2008/2009 academic term. But fortunately, help is on the way thanks to a new federal bill signed into law by President Bush on May 7. The Ensuring Continued Access to Student Loans Act of 2008 is designed to make sure students and families continue to have access to monies made available through federally backed student loan programs.

Why is borrowing money for college more challenging these days?

Less federal funding: The College Cost Reduction and Access Act of 2007, signed into law last fall, cuts federal payments to lenders making student loans by $21 billion over five years. Without these payments, student loans are less profitable.

Subprime spillover: Problems with subprime mortgages are well-known by now. One lesser-known result of the subprime meltdown is that investors are reluctant to buy any kind of securities backed by loans, including student loans.

For these two reasons, along with an overall tightening of credit markets in the past year, some major lenders have trimmed their student loan activity or dropped out altogether.

The Ensuring Continued Access to Student Loans Act allows the federal government to purchase loans not sold to investors, thereby pumping capital into the hands of lenders. It also provides for the flow of federal funds into state guaranty agencies for making loans to students who can’t get loans elsewhere. In addition, it increases the amounts that can be borrowed under the Federal Family Education Loan (FFEL) program,
in particular the unsubsidized Stafford loan.

The bottom line is that student loans should be available for the coming college year. If you’re looking for the best terms on college loans, here are four things you should do:

1) Fill out the Free Application for Federal Student Aid (FAFSA). Do so as soon as possible. This form is necessary in order to get federally backed loans such as Stafford and Perkins loans. The sooner you fill out the FAFSA, the sooner financial aid officers can begin working with you to secure student funding.

2) Minimize debt, but when you do borrow, begin first with the federal loans. “The federal education loan programs offer lower interest rates and more flexible repayment plans than private student loans,” says Mark Kantrowitz, publisher of FinAid.org. Currently, federal student loans have fixed rates no higher than 6.8%. Federal loans have limits, but the new law raises them. Previously, dependent undergraduates could borrow no more than $5,500 per year on Stafford loans, the most common federal student loans, while freshman and sophomores had lower limits. Now the ceiling has been raised by $2,000, so Stafford loans for 2008-2009

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