Credit crunch rattles student loans / LJWorld.com

Archive for Sunday, March 30, 2008

March 30, 2008

Getting a mortgage or finding a low-interest credit card these days aren't the only slices of the financial market tightening up during a national money crunch.

Securing a student loan - the financial enabler for an increasing number of students' post-secondary educations - is becoming more expensive this spring, as participants in government-backed programs are facing the prospects of higher fees and people relying on private loans are finding fewer choices in the market.

With rising demand and dwindling supply, it doesn't take an economics major to know that the numbers could look worse this year for some college-bound students and their families.

"It's an uncomfortable time," said Jeanne Mott, director of financial aid at Baker University in Baldwin City.

Mott and others are quick to point out, however, that conditions are far from dire. Federal student loans will remain available. People who need money will still be able to get it.

It just may not be as easy, and the interest rates may be higher.

"It's tighter money in every segment of the economy," Mott said. "It's just the economy."

Among the areas already lined up to be hardest hit are those who perhaps can least afford it.

Perkins loans

Perkins loans, which are offered by the federal government at the lowest interest rates and with the most favorable terms, are given to students deemed to have the most need in financing their college educations.

A year ago, Kansas University received $3.4 million to dole out in Perkins loans, up from $3.1 million a year earlier.

Next year, however, KU is getting only $1.3 million.

It's an offshoot of the nation's economy and federal government reality. Congress hasn't added any money to the fund that finances Perkins loans, and because the loans' terms are so favorable, students are hanging onto them longer, which leaves less money available for others to tap into.

"That effect, which is happening across the board, is happening at KU, too," said Todd Cohen, a university spokesman. "There will be far fewer student recipients of Perkins loans, but they have other options."

Fewer than 1,000 students at KU get Perkins loans, but this coming year the number indeed will be expected to decline.

Officials in KU's Office of Student Financial Aid expect to start its priority list for such loans by reviewing applications received by March 1 from students receiving no financial assistance whatsoever from their families.

Undergraduate students can receive up to $4,000 a year in Perkins loans, but such loans for this year could be smaller.

"The Perkins (cuts) will be unfortunate," Cohen said.

Stafford loans

Students who may not get Perkins loans may be candidates for Stafford loans. Such financing is guaranteed by the federal government, but carries a higher interest rate.

KU is a direct lender of such funds, which can help keep fees to a minimum and guarantee that money is available. Last year, KU provided a total of $165 million in student financial aid, which includes all forms of assistance.

The key, Cohen said, is to fill out a FAFSA - that's the ubiquitous Free Application for Federal Student Aid - and be in contact with the financial aid office at the school you're intending to attend.

"There's still money available," he said.

At Baker, Mott said, students received $4.1 million in federal loans last year. And while Baker is not a direct lender, it still counts on a network of private lenders who participate in the program to help connect students with the money they need to go to school.

But the pool of lenders is shrinking. Of the 30 or 40 banks who traditionally provide federal loans for Baker students, she said, about a half-dozen have chosen to leave the market.

The defections so far have affected only about 10 students directly, and they are being assisted in finding other lenders. But the decline in options also is being coupled with remaining banks choosing to increase their fees to originate and service such loans.

A freshman can borrow up to $3,500 a year through the Stafford program, she said, and in the past some banks have chosen to charge low fees or waive some of them altogether. But now that credit is tightening, some banks are opting to charge the maximum fees allowed: 2 percent of the loan value.

That means some borrowers could be paying up to another $70 on their loans, on top of wherever interest rates end up.

"With the tightening up of the loan programs altogether, there are some lenders that can no longer cover a portion of the fees," Mott said. "Therefore, it falls back on the student."

Private loans

Another segment of the market also is facing changes, none of which bode well for students.

Private lenders are busy crunching the numbers and deciding how much to charge for loans, and determining which students will qualify.

Private loans, which typically carry higher interest rates than federal loans, often are used to fill the gaps between where federal programs leave off and tuition and other costs begin.

At Baker, for example, tuition and fees for next year are set at $19,980. A year ago, 167 Baker students tapped private loans for $1.02 million.

And so far, at least, Mott hasn't seen a decline in the availability of private loans for students.

But the National Association of Independent Colleges and Universities released a study last week showing that professionals like Mott have reason to be concerned.

In a survey of its members:

¢ 46 percent reported that one of more of their lenders of private, non-federal loans were tightening their requirements.

¢ 43 percent reported that at least one of its lenders were no longer offering the loans.

¢ 20 percent say that one or more lenders were boosting their interest rates on such loans.

"There is widespread uncertainty about the full extent of the credit crunch and what its impact on student borrowers will be, and what safeguards the federal government will have in place to avert a crisis," said David Warren, the association's president.

In testimony earlier this month on Capitol Hill, Philip Day, president and chief executive officer of the National Association of Student Financial Aid Administrators, emphasized that he had yet to hear of anyone being denied a federal student loan because of market conditions. But he acknowledged the market reality for private loans.

"Like other consumer loans affected by the subprime mortgage meltdown, private student loans will be costlier for some borrowers and some institutions this academic year," Day told members of the House Committee on Education and Labor. "However, students and parents should only use private education loans as a last resort. Before borrowing private loans, students should exhaust all the federal, state and institutional financial aid available to them."

Cohen and Mott couldn't agree more.

"The key thing here is that there are funds available, and families need not be concerned that they won't be able to get a loan to go to college," Mott said. "They just need to work with the school they're going to attend to find out the best way to apply."

Discussion

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30 March 2008
at 6:25 a.m.

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merrill (Anonymous) says…

Fed backed student loans should be financed at 2%.
30 March 2008
at 10:19 a.m.

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ktbruns (Anonymous) says…

The article may leave the impression that students who borrow from the Federal Family Education Loan Program (which Baker College and 73 percent of Kansas schools particpate in) pay more for their federal Stafford loans than students at schools that participate in the Federal Direct Loan Program.

The loan terms for FFELP loans and Direct Loans are identical and set by Congress: the interest rates and origination fees (currently, 2.5%) are the same. So borrowers at FFELP schools never pay more for their federal loans than borrowers at Direct Loan schools.

However, FFELP borrowers could pay, and most have paid, less than Direct Loan borrowers.

What lenders have done is offered a discount on interest rates and those fees because they compete with each other.

It's those discounts that are being reduced because of turmoil in the credit markets AND recent budget cuts in FFELP (Congress cut federal support for the lender-based program last fall by 85 percent). So even if a FFELP lender eliminated all of its discounts, its borrowers would pay not a penny more than borrowers at a Direct Loan school.

Kevin Bruns
America's Student Loan Providers
www.aslp.us
30 March 2008
at 12:49 p.m.

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Uhlrick_Hetfield_III (Anonymous) says…

How unfortunate that we enslave our young people to these horrible loans so that they start life deep in debt like so many indentured servants.

To top it off we treat the borrowers like murderers, or traitors by making it so that there is no statute of limitations on the debt.

If that wasn't bad enough, add to all of that that the DOE and its agents are the worst violators of the Federal Fair Debt Collection Act anywhere in the country. They literally behave as if they were above the law.

*#$% college. Go be a plumber, or a carpenter and do something useful to feed your family.
30 March 2008
at 1:35 p.m.

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Sigmund (Anonymous) says…

Uhlrick_Hetfield_III (Anonymous) says: “How unfortunate that we enslave our young people to these horrible loans so that they start life deep in debt like so many indentured servants.”

Students willingly “enslave” themselves because they have been convinced that they will earn more after graduation and will be able to afford the payments. Who perpetuates that myth? The schools that benefit now from the loans that that their students have to pay off in the future!

I was able to get two advanced degrees at KU without a single student loan or relying on my parents and relatives. Students do it all the time. If you can't afford KU without loans, then get your education somewhere else. If you must have a KU sheepskin now but can't afford it today then accept the fact your going to have to pay off the loan you used to paid to the school and teachers who educated you tomorrow.
30 March 2008
at 2:31 p.m.

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sdinges (Anonymous) says…

Here's a crazy idea… why not take a year or two off and get a job instead of excessive student loans? We're not so deep into a recession that it's impossible.

Or, as Uhlrick put it so eloquently: “*#$% college. Go be a plumber, or a carpenter and do something useful to feed your family.”
30 March 2008
at 2:38 p.m.

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inatux (Anonymous) says…

Student loans were, far and large, the largest mistake I have ever made.

Big surprise that Mr. Burns, who signed his comment as someone who represents a student loan provider, would bang the drum.

“Keep borrowing,” is the message. And as the nation burdens itself with debt and no savings, will it have a Dr. Phil moment?

“How's that working for you?”
30 March 2008
at 3:15 p.m.

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TriSigmaKS (Anonymous) says…

If anyone is having issues affording college, look at www.americorps.gov to look at AmeriCorps and VISTA positions as you can after a year of service get an educational award to help pay for future college.

26 September 2008
at 1:58 a.m.

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