Managing Finances

Understanding the Impact of the Credit Crunch on Student Loans

While the cost of going to college keeps rising, and according to recent news, the current credit crunch isn’t helping students trying to further their education. The phrases “credit crunch” and “student loans” are being repeated with increasing frequency in news headlines. After the failures of the Lehman Brothers, Fannie Mae and Freddie Mac, the growing numbers of banks and other loan providers announcing layoffs or plans to leave or limit participation in the student loan market, it is clear that the general problems in the financial markets have created a credit crunch crisis for student loan providers. But is there a loan crisis for student borrowers themselves? Read more to learn about the impact on the student loan market and how to combat financing higher education.

The reality may not match the recent headlines concerning student loans and the credit crunch — at least, not yet. For students that entered the fall term, little evidence exists to suggest large numbers of them were unable to secure the necessary funds for rising tuition costs. For all the reports of a student loan squeeze, actual stories of squeezed students have been more difficult to find.

One reason may be that 90% of student loans are funded through federal programs and only 10% are funded through private student loan sector. To date, the impact has been largely limited to private loans held by fewer than 10 percent of student loan borrowers; those that students typically take out to cover the difference between the total value of their federal, state and institutional grants and loans and the full price of attending the college of their choice. Therefore, it seems that students can still make college a reality even in the middle of a credit crisis. Federal student loans remain readily available to help students and parents pay for college.

Congress established the federal student loan program to help all students have access to higher education, regardless of financial circumstance. That means that students and parents can qualify for federal student loans regardless of credit score, income, assets, or collateral. Federal student loan interest rates are fixed by federal law so families won’t pay higher rates in a troubled economy.

Additionally, Sallie Mae is still ready to make federal student loans to every student who needs one at every school across the country – regardless of size. Sallie Mae issued a news release in June of 2008 stating:

Sallie Mae, the nation’s leading saving- and paying-for-college company, today reiterated its commitment to fund every eligible federal student loan application received from every student at every school for the upcoming academic year.
“Some lenders have ceased lending to certain school types, such as two-year and proprietary institutions. We want students at those schools to know that we will lend to all students at all schools who need a federal loan to pay for college, just as we have for the last 35 years,” said C.E. Andrews, president, Sallie Mae.

With a little bit of planning, college can easily be within a student’s reach, no matter the state of the economy. The same wise advice still applies when it comes to answering the question, “How can I pay for college?” Follow the steps below to begin preparing for your students college future:

  • Complete the FAFSA
  • Get all of the grants and scholarships you can click here to find out!
  • Explore federal student loans for the student — and for the parent
  • Apply for private scholarships
  • Determine what you can contribute from savings and income
  • Consider asking your students school about paying in monthly installments
  • Fill in any remaining gaps with private loans

According to NASFAA (http://www.nasfaa.org/pdfs/2008/mfcolor.pdf) the following applies to finding student loans during today’s credit crunch:

  • Financial aid will be available to students. The credit crunch caused by troubles in the real estate lending industry has no effect on most financial aid including (but not limited to) Pell Grants, Federal Work Study, and education tax benefits.
  • Students should have no problem getting federal student loans.
  • Students can borrow federal Stafford Loans no matter how much money they have. Needier students are eligible for additional benefits.
  • Federal, state and local governments offer a wide range of financial aid for students. Professionals in the financial aid office can recommend many options including (but not limited to) Federal Perkins and PLUS Loans. Private loans should only be used as a last resort.
  • Students can borrow federal loans even if they have bad credit or no credit.
  • Only a few students (some estimate as few as 5%) will have trouble getting private or alternative education loans.

Sources:
www.nasfaa.org/pdfs/2008/mfcolor.pdf
www.insidehighered.com/news/2008/03/12/loans

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