It is hard to avoid hearing the words “bank bailout” these days, but they are ringing especially loud in the ears of college financial offices as officials and students are beginning to worry about what the downturn will mean for financial aid pools and student loan lenders. Financial plans for the fall semester were already in place before the largest hits to the economy occurred. For this reason, the most difficult questions could come in the spring semester for many families.
Two areas of concern, financial aid and student loans, are changing for students who are looking for ways to finance their education. With unemployment rising and a possible recession on the horizon, many families are finding it more difficult to dig up the funds for their children’s degrees. Savings that could previously provide for tuition are draining for families out of work. Because of changing financial conditions, more students are applying for aid. Even where the financial aid pools for colleges has been sufficient — or even generous — in the past, officials are beginning to worry the money may not be enough. Less available financial aid means forcing students to find alternatives.
One traditional complement to a financial aid package is the student loan. Failures in the mortgage market, however, have altered some realities for the student loan market. The student lender market is adjusting and, in some instances, lenders are disappearing because of the economy. With the mortgage market’s decline, investors who finance student loans have been less eager to spend. Lenders, who used the sale of financial instruments to fund their loans, may find they no longer are able to give out as much money.
In addition, the volume of people using loans is only increasing, a problem mirroring the financial aid dilemma. An October survey by Fidelity Investments found that the number of parents who rely on student loans to pay for some portion of tuition has risen this year from 53 percent to 62 percent. This number is likely to rise even higher if the financial aid pools allocated by universities must stretch even thinner. For many students, student loans are significantly influencing their ability to obtain higher education. So what do the changes to the lender market mean for you?
The good news is that the student loan market for federal loans is pretty safe for the borrower. Since these loans are guaranteed by the federal government, most banks are willing to make this type of loan. Even with the increase in loan applications, the federal government has promised that student loans will be available to anyone who qualifies. In shaky economic times, financiers often see these loans as actually beneficial because of their stability.
The bad news is that while federal student loans themselves will be available in the future, your current lender may not be. According to the Project on Student Debt, of the 2,500 student lenders, a few dozen have already begun to make changes in their policies. This number will most likely increase if the economic situation worsens. The government is doing its part to help; the U.S. Department of Education is now able to purchase bank loans which will add liquidity to the market. This should help quell the number of lenders exiting the market and make finding replacement lenders easier.
Private lending may end up being the area more affected by the economic decline. Credit history, if you are looking toward private lenders, will be a major factor in the cost of borrowing. Sallie Mae, one of the biggest private lenders to college students, recently increased its lending standards and raised its interest rates. For students (or more often parents) with good credit history, the effects will not be as strong. If your credit is less than perfect, you might want to consider all federal options first. PLUS loans, through the federal government, are one route to take. If your parents’ credit history makes you unable to receive the PLUS loan, you’ll be eligible to receive other federal loans based on their financial conditions.
With the current economic situation, the interest from a private loan will increase the cost of your education more than it would have a few months ago. Take into careful consideration your prospects post-graduation before agreeing to any high-interest private loan. The most important thing to remember is to plan ahead and be realistic about what you can afford.
Lauren’s column runs biweekly Thursdays. She can be reached at l.palmer@cavalierdaily.com.
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