The country’s widening “credit crunch” has caught up with the student lending industry, and students across the nation this spring may pay higher interest rates and fees and find it more difficult to borrow.
Philip Lane, chair of the economics department at Fairfield, said everyone looking for loans this year will see the impact of the “credit crunch” problem.
“However, individuals with established relationships and the same qualifications from previous years should not see significant changes,” said Lane. “The student loan market was not at the center of the credit market problem.”
Many students first turn to federal loans to finance their education, whose interest rates are capped by law. But when these federal loans don’t provide enough money, or when families need more flexible repayment options, they turn to private education loans.
Likewise, most affected by the crunch will be students who turn to these private loans. Private loans, offered through banks, credit unions and other lenders charge variable interest rates depending on your credit score.
Students taking out these types of loans could see their rates rise by half a percentage point to a full point, according to the financial aid guide FinAid.
“Only a small part of the market will see significantly stricter standards, but overall rates may be slightly higher,” said Lane.
Students like, Hailey Conn ’10, whose family uses both federal loans and private loans to finance her education, may be affected by even very small increases since they are dealing with such large sums of money.
“The uncertainty of the rates will definitely impact me,” said Conn. “I don’t really think about my loans that much now, but after school I’ll be working to pay off a lot of my loans myself.”
Conn’s family is paying for the first two years of her education, and she is paying the loans that are taken out to supplement the last two years herself.
“If interest rates continue to go up, I’ll end up paying more for the last two years that I have to pay back,” she said.
Lenders are having a hard time raising enough cash to keep making loans, according to a February story from U.S. News and World Report.
Lenders have had to scale back their activities and in some cases, even temporarily stop making federally guaranteed loans, due to the ensuing credit market crunch.
At least a dozen firms have stopped issuing private loans due to problems in the debt market.
Lenders have also been coping with the federal government cutting billions of dollars in subsidies to lenders who make federally guaranteed loans.
The easiest way for college students to find the best deal on lenders is to turn to University-preferred lenders.
Lane agreed that Fairfield’s preferred lenders are the best place to start the loan process, “but look at your local community banks as well as credit unions for options.”
Fairfield, like most universities, conducts an annual bidding process and compiles a list of preferred lenders that offer students lower-than-usual interest rates and fees.
“While we are seeing shifts in the set of loan providers, we have been assured by several lenders that they are prepared to meet our student borrowing needs for the 2008-09 academic year,” said Erin Chiaro, director of Financial Aid.
“We are encouraging students interested in borrowing through student loans to secure them as soon as possible.”
Preferred lenders for the 2008-09 year include Nellie Mae, Sallie Mae, AMS Citizens Bank and Citibank.
Fairfield’s preferred lenders were chosen “because they offer excellent customer service and they are familiar with Fairfield University’s loan processing procedures,” Chiaro said.
These lenders received the highest ratings after being reviewed and evaluated by Financial Aid. The ratings are based upon several criteria, including borrower benefits, school certification processing, servicing of the loan and economic stability.
Sallie Mae, the nation’s largest student lender, announced in late January that it posted $1.6 billion in losses in the fourth quarter alone, due to partial defaults on student loans.
The lender wrote in a filing in early January with the Securities and Exchange Commission (SEC) that it plans to be more selective in granting loans, though it did not detail the specifics of how it will tighten lending standards.
Fairfield is not affected by the changes from Sallie Mae, according to Chiaro.
“Sallie Mae is being more selective in servicing loans to trade and vocational schools that have high default rates,” he said.
According to FinAid, lenders are likely to require a credit score of at least 650 to secure a private loan, up from a previous requirement of 620. Students who have no credit and no cosigner will find their interest rates to be higher.
FinAid also expects that lenders will cut loan discounts and increase minimum balance requirements for loan consolidation.
The difference in borrower benefits offered by all 2008-09 preferred lenders, including Sallie Mae, can be reviewed at salliemae.com/fairfield
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