Paying College Tabs As Loans Dry Up
The beginning of the school year should be exciting, but for many college students who are suddenly unsure how they're going to pay their tuition, it may be scary, instead.
On The Early Show Thursday, resident financial adviser Ray Martin had words of wisdom for students and their families who are suddenly struggling to come up with the money for tuition.
According to Martin:
We've been hearing a lot about the credit crunch trickling down into the student loan market, but that perfect storm isn't finished brewing yet. Many students and their parents are only now realizing they can't afford fall tuition bills.
Why?
For starters, a record number of students filed for financial aid in the first six months of the year. There was an increase of 16.3 percent nationwide, with an increase of almost 20 percent in California and other states that have been hit hard by the mortgage meltdown.
About three-quarters of full-time college students receive financial aid, and most families cobble together three or four loans to pay the bills, according to Kevin Walker, CEO of Simple Tuition, Inc., which enables students and parents to compare various student loan options.
The number and type of student loans available has changed dramatically this year.
Last year, about a quarter of all such loans were private loans, not federally-backed loans. But some lenders have stopped offering private student loans, meaning even if you received a loan from the lender last year, you won't get one for this school year.
While many lenders, such as Citigroup and Bank of America, pulled out of the business in the spring, Wachovia just announced it would stop financing undergrad loans last week. The non-profit Massachusetts Education Financing Authority said in late July it couldn't raise the money needed to finance private student loans, leaving roughly 32,000 would-be borrowers in a lurch. Those are just two examples of how students and parents are having the rug pulled out from under them NOW, days or weeks before school begins and bills are due.
Even lenders that still offer private student loans have tightened their credit standards. According to the Wall Street Journal, "Tens of thousands of students and their families have credit scores that will make it difficult for them to qualify for private loans that they could have landed in years past."
Some lenders have decided to stop offering federal student loans, as well. That doesn't mean the federal money won't be available to students; it just means students now need to find a different place to borrow that money.
Simple Tuition's Walker says that last year, $25-to-$28 billion in home equity was tapped to cover education costs. He thinks a large number of families will be unable to use home equity for that purpose this year, or will be too nervous to, worried that their home value may fall.
Compounding things is that individuals' financial woes have continued to grow: Parents have lost jobs, or seen their home go into foreclosure, leaving them unable to help their students with tuition and other college costs.
So, what are families supposed to do now?
For Martin's suggestions, go to Page 2.
Call Financial Aid Office: Your school should be your first stop. If you suddenly find that your promised loans aren't going to come through, or your family's financial situation has changed, alert your school. The financial aid office will likely have advice about where to turn next. The National Association of Student Financial Aid Administrators and other experts agree that schools are going to be more accommodating than ever this year. They will work with you if there's a gap between when tuition is due and when your various loans come through.
Max Out Federal Aid: If you didn't apply for federal student aid earlier in the year but now need the help, it's not too late to apply. Most schools do set deadlines for applying -- you'll often see deadlines as early as March in order to receive loans in the fall -- but that's simply to make the financial aid process run more smoothly at the school and for lenders; the deadline isn't set by Washington. You can still qualify for loans now, and you'll typically know within three business days how much federal money you're eligible to borrow. It's also important to know that you don't need to pass a credit check in order to qualify for a federal student loan, and the amount students can receive recently was increased by $2,000 a year. Federal loans will always be a better deal than private student loans -- interest rates will always be lower -- so take full advantage of these loans before moving on to private loans.
Consider a "PLUS" Loan: Federal student loans are in a student's name, but parents can also borrow money through government programs to finance a child's schooling. Parent Loans for Undergraduate Students have lower interest rates than most private loans, and are easier to obtain.
Shop Around for Private Loans: If you need to turn to private loans and you're scrambling for a loan right now, don't feel forced to accept any private loan that comes your direction. Keep in mind that, while it may not feel like it, there are still a lot of options out there. Interest rates, fees and credit requirements vary widely so, just as when shopping for a mortgage, it pays to explore different lenders. In addition to your school's financial aid office, there are a host of Web sites that help you sort through and compare various private loans.
Find a Co-Signer: If students need to turn to private lenders for loans, then try to get a co-signer for the loans. Often, students don't have an established credit history or they have low credit sores, resulting in high interest rates and extra fees. But interest rates on loans for which there is a co-signer with good credit can be much lower.
Don't Use Credit Cards: Whatever you do, Martin cautions, don't surrender and put your college costs on your credit card. You'll saddle yourself with a LOT of high-interest debt, and will likely be paying it back for years to come.