Managing Finances

Tips on Maximizing Financial Aid Options during Credit Crunch

As the credit crunch deepens, it’s putting more private student loan companies out of business and leaving fewer students able to qualify for private loans. While there are many options for financing a college education, as private loans dry up, there will be increased competition for other available financial aid. Read our tips to ensure you and your family plan ahead and qualify for as many options as possible.

Earlier this year, experts worried that the volatility of financial markets could disrupt loan access for an estimated 6.7 million students expecting to apply for federal loans as scores of student-loan providers pulled out of the government-subsidized loan program. But luckily, federal student loan fallout has been avoided, but requirements and competition are stiffening for private student loans.

In all, 33 private student loan companies have ceased private student loan lending since July 2007. Lenders have either halted lending or increased their lending requirements, making it harder for students to get private loans.

The vast majority of student borrowers, nationally, use student loans such as Perkins and Stafford loans backed by the federal government. These loans come with competitive interest rates and low borrowing limits. A first-year undergraduate student can borrow $5,000. Juniors and seniors are allowed $7,500.

To cover additional costs, often students resort to costlier private loans. More than 30 lenders have dropped out of private college loan lending, including banks such as Bank of America, Washington Mutual and Nelnet, one of the nation’s largest loan consolidators. With fewer players in the game, the rules are changing.

Changing Credit Requirements
Those with the best credit will have fewer obstacles in qualifying for private student loans. Credit score requirements are shifting upward, as well as the need for cosigner on a student with little or no credit established in their name. Ways to offset these changes are to work to establish credit in your student’s name earlier – through auto loans or a credit card (preferably one without a balance owed). But, also remember that established credit is not worth much to a lender if payments haven’t been made on time.
The tighter requirements may exclude more borrowers who were previously eligible, but bad credit can be reversed over time by eliminating revolving debt and paying all creditors on time. A borrower’s credit score is determined by a combination of payment history, debt to available credit and also by the number of inquiries into your credit. Too much available credit can lower your score, especially the more that is owed, even with perfect payment history.
With private loan qualification requirements tightening, remember – there are plenty of other financial aid options available. The following are some tips students and parents should keep in mind to help ensure they will receive as much Financial Aid as possible:

Be Cost Conscious
Experts advise students to be aware of how much tuition and cost of living can cost at the desired schools. Even if you qualify for financial aid at a more expensive school, you may be unable to make up the difference with loans and savings.

Apply to More Schools
It is recommended that students apply to multiple colleges so that they’ll have a mix of different financial aid packages to choose from. Applying to just two or three schools can get you stuck with enrolling in a school that you ultimately can’t afford. Although applying to several colleges will cost more (the average application fee is about $35), the financial aid savings will make it worth the extra upfront expense.

Visit the Financial Aid Office
The next step is determine all of your financial aid options. To learn more about available financial aid, read our recent article. Another valuable resource is to speak to financial aid officers at your student’s school. Students should be talking to them about maximizing all federal loans and scholarships. Private loans should always be the last resort. Federal loans are significantly cheaper and offer better repayment terms than private ones.

Investigate Scholarships and Grants
Apply to nationwide, state and local scholarships and grants. There’s a better chance students will win local scholarships since there is less competition than with national ones. To learn more about scholarship and grant options,read this article.


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