Despite Credit Crunch, Loans Still AvailableOctober 10, 2008 |
Despite the economic downturn and instability of the credit markets, college students are acquiring college loans, although the qualifying criterion has become more stringent, financial aid officials say.
Earlier this year, pundits worried the volatility of financial markets could disrupt loan access for an estimated 6.7 million students expecting to apply for federal loans as scores of student-loan providers pulled out of the government-subsidized loan program.
With congressional intervention, a federal loan fallout was avoided, says
Robert Shireman, president of the Institute for College Access & Success and executive director of the Project on Student Debt.
“Congress has done a good job of making sure that those loans are flowing with the minimum of interruptions, even during this credit mess. Congress made the student loan program an entitlement. Everyone who qualifies gets a loan, even if more people want loans than the government expected,” Shireman says.
The vast majority of student borrowers, nationally, use student loans such as Perkins and Stafford loans backed by the federal government. These loans come with competitive interest rates and low borrowing limits. A first-year undergraduate student can borrow $5,000. Juniors and seniors are allowed $7,500.
To cover additional costs, students resort to costlier private loans. More than 30 lenders have dropped out of private college loan lending, including banks such as Bank of America, Washington Mutual and Nelnet, one of the nation’s largest loan consolidators. With fewer players in the game, the rules are changing.
Private lenders are charging higher interest rates, demanding higher credit scores and insisting on more cosigners. Traditionally, a student could get a private loan with a credit score of about 620. Now anything under 650 is considered subprime, according to FinAid.org, an aid resource organization.
Odunola Ojewumi a freshmen at Howard University, is using federal and private loans to finance her college education.
“My family couldn’t afford to send me to Howard, so I worked to get outside scholarships,” she says. “Scholarships don’t cover the entire balance. I had to take out a federal loan to pay for college. The loan is so minimal, that I have to take out a student loan from a [private] company to pay for the spring semester. My mother refused a [parent plus] loan because of the high interest rate.”
The $700 billion federal rescue plan, signed into law last week, is expected to free up more money for college lending. Until then, families looking for private loans or loans through Parent Plus will encounter obstacles.
Kevin Burns, director of financial aid at Norfolk State University in Virginia, says parents looking to apply for a Parent Plus loans, loans designed to allow families to borrow on behalf of dependents, are feeling the tightest squeeze of the credit crunch, not students.
“Families, if they went through a home foreclosure or they maxed out a credit card or they are paying high-interest consumer loans, are being denied. We didn’t see as many denials last year as we are seeing this year,” Burns adds, noting that private lenders have been particularly hard on first-year students.
Time magazine reports that loans made to parents through the PLUS program, which considers credit history, fell 29 percent in dollar volume.
“We have had to deal with the tightening of credit markets,” says Tomikia LeGrand, assistant vice chancellor for enrollment services at Winston Salem State University in North Carolina. “Some lenders that were on our preferred lender list are no longer in business, such as College Loan Corporation (CLC), and Wachovia. However, WSSU does its best to list lenders that offer comparable loan benefits that coincide with the federal government established loan rates. During this credit crunch, students have a shorter list to work from.”
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