The student loan industry is in turmoil. Since Jan. 1, more than 60 lenders, or 14% of the market, have announced plans to stop making loans backed by the Federal government. Lenders are also making it harder for families to qualify for private loans, which lack government backing and often bridge the gap between financial aid and the cost of college. With peak season for student loan borrowing about to begin, BusinessWeek's (MHP) Anne Tergesen spoke with Mark Kantrowitz, publisher of financial aid Web site FinAid.org, who recently testified before Congress about the impact of the credit crunch on borrowers.
What's behind the problems?
Contagion from the subprime mortgage crisis has infected the education loan marketplace. Investors have pulled back from buying all sorts of securities, including those backed by student loans. Lenders can't sell their loans to raise capital to make new ones. Also, in the wake of last year's scandals over conflicts of interest in the student loan industry, Congress cut federal subsidies to lenders. The industry joke is that Congress took away half the lenders' profits and the credit crisis took away the other half. Only it's no joke.
What impact have borrowers felt?
Although lenders don't look at credit scores when making federal loans, parents can be turned down for PLUS loans if they have an adverse credit history, which includes a debt repayment 90 days or more past due or a recent foreclosure. Costs have also increased for borrowers of federal loans. Maximum interest rates and fees are set by law. But the discounts lenders routinely offer have been cut in half. In private loans, several big lenders have raised rates by almost 1 percentage point. Previously, you could get a private loan with a FICO credit score as low as 620. Now lenders want to see at least 650, maybe even 700. More than 100,000 families, or 1% to 2% of borrowers, are being turned down for PLUS and private loans.
What can they do?
If a parent is denied a PLUS loan, an undergrad can borrow $4,000 more for each of the first two years of college and $5,000 more for each of the last years under the federal loan program.
Should people rush to lock in a loan?
No. The lender may leave the business before the loan is disbursed. You need to figure out which lenders are still available and have a backup if your choice drops out. Larger banks are least likely to leave since they can rely on customer deposits as a source of funds. Those who want to consolidate (by combining variable-rate federal loans to lock in a fixed rate) should wait until after July 1, when rates reset. I expect rates to fall by more than 3 percentage points. But with lenders representing 76% of [the consolidation] market having left the business, your lender may no longer be there. You can consolidate through the federal government at www.loanconsolidation.ed.gov.