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The Credit Crunch Means Bad News For Student Loans

May 27, 2008

Posted by Roshawn Watson under Uncategorized

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By: Roshawn Watson

Last month, we discussed the coming student loan crunch. Well, here it is.

Many lenders have quit offering government-insured loans through the Federal Family Education Loan Program, or FFELP. This program includes Stafford loans (for students) and PLUS loans (for parents). Due to the turbulent credit market, the lenders are no longer making profits on these programs. The remaining lenders are mostly small.

The ramification is the increasing difficulty for some borrowers to secure loans for school. Traditional, dependent students, with creditworthy families, are expected to have enough money for school year 2008-2009; however, they may likely pay higher fees than they did last year. Independent students with modest credit histories and no co- signer will have more of a challenge, especially if they are just beginning school (i.e. freshman year) because lenders with limited funds would rather help THEIR current borrowers finish school. Students with poor credit (credit scores less than 700) may also be in trouble. Additionally, students attending for-profit career schools and some community colleges may have to scramble because students attending these schools historically have high default rates. Parents with minor delinquencies will be allowed to borrow through the FFELP, but those in serious financial trouble (foreclosure or bankruptcy) will not be able to participate for the next five years.

In addition to FFELP, the government also runs a Direct Loan Program allowing parents and students to borrow directly from the U.S. Education Department. This bypasses the banks. If a school offers this option, all students can borrow the maximum allowed and will not be turned down.

Nevertheless, college financial-aid officers will expand the list of banks and other sources they work with. The aid office should be your first call when you are rounding up money. Work with them to find money, so that you can pay the tuition.

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