Vision Credit Education, Inc.

The mortgage crisis and resulting credit crunch has affected a lot more people besides those on Wall Street. One affected group that may be overlooked is college students. Student loans are often a necessity for most students seeking a higher-level degree.

Here are some statistics about student loans in the U.S.:

• In 2004, 66% of graduates from 4-year colleges and universities had student loan debt
• Students are borrowing more: 58% increase in the amount borrowed over the past decade
• Average student loan debt is $10,000

Since the cost of college is increasing at twice the rate of inflation, it’s no wonder students are turning to student loans more often and for larger amounts.

There are a couple options students have when it comes to financing a college education through loans. They can take out a federal student loan, which has a relatively flexible pay-back schedule and lower-than-average interest rates. These loans are typically seen as ideal, but still are done through a commercial bank. 

Students also have the option of taking out a private loan if they don’t qualify for a federal student loan or need more money. These loans come with higher interest rates and more rigid payback plans.

Finally, the parents of students have the option of taking out a Federal Parent PLUS loan that helps make up the difference between their child’s loan and the cost of tuition.

The credit crunch has affected these loan-seeking undergraduates by limiting the number of banks offering federal student loans. The reason for this originates on Wall Street. Since the mortgage crisis has severely damaged investor confidence, investors have stopped investing in the financial instruments many banks use to finance student loans. As a result, many banks have reduced or even completely abolished their student loan programs.

Also, the rates on federal student loans were fixed in 2006. Before 2006, the interest on these loans would change from year to year. From 2002 to 2005, interest rates were at all-time lows, and students were able to lock in these rates by taking out a federal consolidation loan. As the interest rates rose, the government would still pay the bank the interest at the higher rate. As a result, banks made a lot of money from these consolidations. Now that the rates are fixed, lending to students isn’t nearly as attractive.

For-profit colleges and universities along with community colleges are the most affected because students attending these institutions borrow less money for shorter periods of time, making the interest banks earn on them smaller. Also, the requirements for taking out a student loan are becoming more strict. Sometimes students need a higher credit score or their parents are more highly scrutinized as co-signers.

Banks have also started to incorporate more of the costs they incur into the student loans they offer. For example, banks are beginning to transfer the 1 percent federal default fee to the borrower instead of paying it themselves.

The number of students taking out private loans has been steadily increasing over the years, and the requirements for these types of loans are becoming more strict, as well. The credit score for a private loan has increased from 620 to 650-700.

In response to these developments, Congress passed the Ensuring Continued Access to Student Loans Act of 2008. The provisions of this act apply to all loans made after July 1st, 2008. The purpose of the Act is to make sure students have the necessary access to student loans in the current credit crunch. The major provisions include:

• A $2000 increase on the annual limit available to dependent undergrads, with a cap on the total loan at $31,000
• A $6000 increase on the annual limit available to independent undergrads and those whose parents don’t qualify for Federal Parent PLUS loans, with a cap on the total loan at $57,500
• Parents can defer payment on a Federal Parent PLUS loan while student is still in school
• Parents not automatically ineligible for a PLUS loan because of a delinquency on a primary home mortgage or medical bill payments occurring during the mortgage and credit crisis
• Expands the Lender of Last Resort (LLR) program to possibly include entire schools to make sure all students attending have access to loan money, government will buy the loans of these students

The final provision refers to a program created by the Higher Education Act that allows the U.S. Secretary of Education to designate certain lending institutions as lenders of last resort for those students who cannot obtain a loan from anyone else. With so many banks reducing or eliminating their student loan programs, some students are finding that there are no lenders available in their geographic area. Thus, it’s possible for all the students attending a school in a certain area to not have access to loan money. Expanding the LLR program is supposed to address this potential problem.

While it’s currently more difficult to obtain a federal student loan, it’s reasonable to assume that every student who qualifies for one has the ability to obtain it. Even if there isn’t a willing lender in your area, there is at least one designated lender of last resort. Make sure to exhaust all of your federal student loan options before turning to a private student loan.

If you absolutely must take out a private student loan, try to find a credit-worthy co-signer because it will greatly increase your chances of qualifying for the loan. Since a private loan is more expensive, make sure the cost of the school is worth it. Evaluating the school’s job placement statistics will give you an idea of how easy it will be to find a job right after graduation and repay the loan. Finally, don’t forget about scholarships offered through the school or elsewhere. Every little bit helps.

Related Link

Student Credit Card Debt Increasing