Recent Credit Crisis Affects Student Borrowers
Lenders of student loans have been feeling the effects of the recent credit and housing crisis and it’s now starting to affect the students who borrow from them. The problem they are facing is that they are unable to raise money in the financial markets like they normally do. While the credit crisis is being felt in all financial areas, it will now be hitting hard on the college students seeking private student loans and loan consolidations.
Earlier this month, The Education Resources Institute Inc., a Boston nonprofit that guarantees student loans, filed for bankruptcy and left the more than 500 students without means to pay their tuition and bills. This is a growing trend with more than 50 firms having abandoned or cut back their federal or private student loan programs.
Loans are going to be harder to come by and more expensive for students and parents who are applying for financial aid and loans for the upcoming school year. In the past, families used to secure student loans almost regardless of their credit history.
From the Boston Globe, Credit Crisis Hits Students Borrowers:
Student loans have been among the easiest and cheapest loans to get - allowing millions of Americans to go to college as long as they promised to pay the bills after graduation. Given this year’s challenging environment, many colleges are offering more assistance to students, such as more generous grants and direct government-backed loans with capped interest rates, such as Stafford loans.
This month also saw some bad luck for customers of Citigroup, one of the largest private student loan lenders. Citigroup announced it would stop lending at some schools and end its federal loan consolidations. This is a big problem for students and graduates looking to save in interest payments by consolidating their student loans. Bank of America Corp., the third-largest student lender in the country, is also jumping ship by saying they will no longer be offering private student loans.
OregonLive.com also chimes in with Credit Crisis is Squeezing Student Loans, saying:
Profitability is at the core of the pullback in student loans that could cause a credit crunch for students and families.
Here are the basics of the the problem: For lenders other than banks, which must raise capital to make loans, the recent crisis’ means it’s costing more to raise those funds. If the difference between the cost of that capital and how much they can charge for loans (federal student loan rates are capped at 6.8 percent and 8.5 percent, depending on the type) is too small, many just stop their lending practices and consolidations in favor of protecting themselves and their profits.
With the rising costs of college, a typical family will have to come up with at least $20,000 on their own, whether from loans or savings, if attending a private college cost which is about $45,000 a year. Now with many private lenders looking to get out of the market, these families will have a harder time finding loans. And consolidation may not be an option either.
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