Economy Hinders Student Loan Options

This story was written by Anita Pere, The Lariat
College students may need an alternative to alternative education loans next school year.

Once easy to get, the availability of private or alternative education loans may be hindered by more stringent regulations on lending, prompted by the unstable economy.

A student with a less-than-perfect credit history could get a high-interest loan from a private lender in past years, but this may not be the case now, said Mark Kantrowitz, publisher of

The Project on Student Debt identified the mortgage market as the culprit of student loan worries in their article, "The Real Story on Student Loans and the Credit Squeeze."

"Mostly because of problems in the mortgage market, there has been a decline in the number of investors willing to purchase some types of financial instrument," the article reads. "Some student loan companies have been using these methods of financing to raise money to make student loans. With the unexpected loss of financing, these companies will need to either get out of the student loan market or revamp their financing methods."

But the good news is that experts agree the credit crunch is the lenders', not the students', problem.

At a United States Senate hearing March 12, Sen. Edward Kennedy, head of the Senate Education Committee, said the credit crunch is primarily impacting banks and other lenders, as many financial lenders can no longer afford to lend educational loans.

This week manufactures and Traders Trust Company, The Hong Kong and Shanghai Banking Corporation and the Twin City Federal Bank all announced this week a halt on college lending, Kantrowitz said.

Kennedy warned that students might have to choose different lenders for Federal Stafford Loans also, as many banks can't afford to lend these types of loans.

Kantrowitz supported Kennedy's stance that the economy is more severely affecting the lenders and not students.

Kantrowitz also said the diminishing competition of loan lenders shouldn't be a huge concern to students now, but may be next year.

"Choices are going to be much more limited...I'm much more concerned about lenders leaving a year from now," he said.

Bob Shireman, president of The Institute for College Access and Success, and Kantrowitz recommended students fully exhaust all possibilities for receiving federal aid before turning to alternative loans. Students sometimes do not fill out the Free Application for Federal Student Aid (FAFSA) because they think they won't be eligible for aid or because applying for alternative loans is easier.

Kennedy estimated 40 to 60 percent of students haven't taken full advantage of federal options for financing college.

The Web site for "The Project on Student Debt" unveiled a way students can get extra Stafford loans so they don't need to go to private lenders.

"If your parents have serious credit problems and can't get a (federal) PLUS loan, the financial aid officials at your school can double your eligibility for federal students loans," allowing students to borrow up to $46,000 in Stafford loans, reads the Web site.

Kantrowitz encouraged students to tell their financial aid officers if they still cannot get the loans they need. Financial aid officers can sign the college up for the Direct Loan program, in which money for college loans comes straight from the Federal Reserve.

For recent college graduates, interest rates on Federal Consolidation Loans are adjusted every July based on Federal Reserve figures. Kantrowitz projects that this July, Federal Consolidation Loan rates will fall from 7.25 percent to 3.5 percent or lower.

"It's going to be largest decrease in the history of the student loan program," Kantrowitz said. "If anything, I'm being very conservative (with my rediction). Over the past 10 years, I've never been wrong with any of my predictions."
© 2008 The Lariat via U-WIRE