Student lenders, strained by the economic downturn and credit crunch, are closing their doors and raising their standards after this week's market meltdown, making it increasingly difficult to obtain college loans. The Lehman Brothers bankruptcy and the sale of Wachovia, both major players in the student lending industry, will likely further limit private loan options for students.
The student-lending industry has been under pressure since January 2008, as the effects of the subprime mortgage crisis forced a number of private lenders to cut back on student loans, or abandon the student-lending business altogether. Lenders are experiencing a liquidity problem -- lenders have stopped lending to one another, making capital scarce and thus more expensive, and further straining lenders.
"The capital markets have essentially frozen up," Mark Kantrowitz, publisher of FinAid.com, said. "In order to lend money, you have to have money."
In March 2008, the New Hampshire Higher Education Loan Corporation, a lender and secondary market for student loans, suspended its private loan program, and redirected limited funds to support its federal loan progam. The company made the strategic decision after realizing it was in danger of running out of funds for loans in fall 2008, according to Tara Payne, vice president of marketing and communications for the New Hampshire Higher Education Assistance Foundation.
Kevin Bruns, executive director of America's Student Loan Providers, an organization of about 80 federal loan providers, said recent events will make it more difficult for students to find private loans. When they do, he added, they will face higher up-front fees, possible co-signer requirements and more stringent qualification standards.
Some students with private loans will also see their interest go up in October by two to three percent, Kantrowitz said. A number of student lenders -- including Sallie Mae, one of the nation's largest lenders -- peg private loan interest rates to the London Interbank Offered Rate index, has "sky-rocketed" in the past two weeks, according to Kantrowitz. Students who are currently in school and have not begun paying interest may not notice the difference at first, he said, but interest at the higher rate will still accrue.
Federal loans are more secure, however, due in part to the Ensuring Continued Access to Student Loans Act of 2008, signed into law on May 7. In addition to stabilizing the federal loan program, ECASLA allows more parents to take advantage of PLUS loans and increases the limits on unsubsidized Stafford Loans, Erica Eriksdotter, corporate communications representative for Sallie Mae, said in an e-mail to The Dartmouth.
Because this legislation has provided some relief for the federal program, but does not aid private lending, Kantrowitz said he recommends that students opt for federal loans when possible.
ECASLA may raise the threshold for federal loans enough that some students and parents will not have to tap into a private lending source, Bruns said.
Federal lending programs are not immune to the problems faced by private lenders, and students who take Stafford Loans will see the benefits of the loan decrease significantly, Virginia Hazen, director of financial aid at the College, said.
The federal government insists that the federal direct loan program, which cuts out the middleman in the loan-awarding process, would act as a safety net if the loan system stopped functioning, Hazen said. Hazen and Payne question whether the direct loan program has the infrastructure in place to take over if too many other lenders close.
