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Student Loans Drying Up: What You Must Know About Borrowing This Fall


Many students nationwide may find themselves scrambling to find student loans to pay for tuition this September. According to an ABC News report, more than 100 lenders nationwide have announced they will cease offering student loans due to the crippled credit market.

The ABC article says that in just the past few days, the Texas A&M University financial aid office has learned seven different lenders will no longer provide federally guaranteed loans. The Massachusetts Educational Financing Authority is one. MEFA announced recently it will be unable to provide low-interest student loans this year due to the national credit crunch. Last year MEFA provided more than $500 million in student loans to at least 40,000 families.

The credit crunch is affecting both federally-backed loans and private loans. While lenders have chosen to stop offering federally-backed loans, including Stafford and PLUS loans, Congress passed the Ensuring Continued Access to Student Loans Act of 2008 in May to quell fears that student loans would be unavailable this fall. While it is reassuring Washington doesn’t want students to forgo school because of a lack of funding, finding that tuition money might still be tricky. What can you do?

Federally-backed student loans

Many student loans are guaranteed by the U.S. Government even though the money is provided by private banks. This year, however, banks aren’t willing to invest cash in loans that—while safe—aren’t their most profitable. To be eligible to receive a federally-backed student loan, students and their parents must complete the Free Application for Federal Student Aid (FAFSA).

Stafford loans (available to eligible students without a credit check) and PLUS loans (available to parents of students with a credit check) are available either directly from the government (through DirectLoan) or through commercial lenders like Sallie Mae, Citibank, and others, through the Federal Family Education Loan Program (FFELP). FFELP lenders closing their doors will mean fewer options—and higher interest rates—for both direct and FFELP borrowers. Check with your college financial aid office for a list of lenders still participating in FFELP. Contact several lenders and compare their rates to DirectLoan. In the worst-case scenario, you’ll pay a higher rate than last year, but you can still get your Stafford or PLUS loan.

Perkins loans will be least affected by the current market. Perkins loans are federally subsidized, need-based loans available to undergraduate students at a fixed 5% interest rate. Your financial aid office should be able to tell you how to apply for your Perkins loan, which should be business as usual.

Private student loans

For some students, federally-backed student loans are not enough. That’s because federally-backed loans limit how much students can borrow—both annually, and in total. These students turn to private loans. Banks large and small offer private student loans just like they offer auto loans and mortgages. But unlike federally-backed programs, private loan interest rates are higher and are based upon the current lending market and the borrower’s credit history. Private loans may also not carry the same grace periods and flexible repayment terms of some federally-backed loans.

Plus, private student loans are drying up even faster than federally-guaranteed loans. Banks simply don’t have the cash to lend, or don’t want to take the risk. If you have relied upon private student loans in the past and have strong credit, you may still be OK, though you might have to do some homework to find the best interest rate. If your credit score is sketchy, we recommend you start looking at alternative ways to fund school including scholarships, grants, and employment.

For more information on finding the right student loans for you, the National Association of Student Financial Aid Administrators provides some financial aid tips for parents and students.

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. EXCELLENT article… every student looking for an update on the student loan market should read this!