Will students and parents have difficulty obtaining loans for college this year?

Federal loans (Stafford, GRADPLUS and PLUS) for college will be available. Approximately 2,000 lenders, including the largest and most diversified banks, remain in the FFELP. In addition, Federal Direct Loans, which are provided directly from the U.S. Treasury, will not be affected by the recent credit crunch.

While the majority of students and parents should not encounter any difficulty obtaining a Stafford or PLUS loan, understand that some lenders will no longer offer these loans to students attending schools that have higher than average default rates and lower than average graduation rates.

These students may have to select another lender, but they will still have access to federal loans.

Why are lenders limiting federal loan options to these students?

There are 2 factors in play. First, in recent years, subprime mortgages and foreclosures have sparked a national credit crunch. Some student loan lenders, especially those whose sole source of revenue is student loans, make loans and then sell them in the asset-backed securities market, and they have been unable to find willing investors. That’s resulted in a lack of liquidity for these lenders, who are now unable to make new loans to students. Second, the federal government recently cut subsidies paid to FFELP lenders, thereby making these loans less profitable. The combination of the 2 factors has caused some lenders to stop making FFELP loans altogether or to limit which institutions (and subsequently borrowers) they will lend to.

I’ve heard that some lenders are refusing to lend to 2-year or proprietary colleges. Will our students be able to find loans to attend these schools?

It is true that some lenders have decided to stop lending to either specific schools or categories of schools, such as 2-year institutions, because the average loan debt per borrower is lower and therefore less profitable for the lenders. But other lenders have stepped in to fill the gap, so your students will not be left high and dry. However, if your students find that the lenders they used in past years are not lending to their institutions any more, the students will need to fill out new Master Promissory Notes and find new lenders. Just as important, these students will have an additional lender to keep track of and repay after school.

Is the student loan credit crunch situation permanent or temporary?

Most lenders have stated they hope to resume their normal student loan volumes if credit conditions improve.

Is the government doing anything to help?

Congress recently passed legislation that is easing the situation somewhat. The new law will allow the federal government to inject liquidity into the student loan program by acting as a secondary market to buy existing FFELP loans from lenders. This move has already encouraged some lenders to rejoin the FFELP. The legislation also raises federal loan limits so students may fund their educations with a greater proportion of advantageous federal aid while borrowing a lesser share of costly, and perhaps unavailable, private loans. Lastly, the Department of Education is expanding its capability to originate Direct Loans.

I have a student who took out a federal student loan last year. How will he know if his lender is still granting federal loans; and if it is not, what should he do?

The school will most likely notify students if they need a new lender. Students may also contact their lenders directly and ask if they are still participating in the FFELP. If a lender has stopped making FFELP loans, the student can choose another lender and will have to sign a new Master Promissory Note. Approximately 2,000 lenders still participate in the FFELP. Students with questions on choosing another lender should talk to their financial aid office.

What about private loans?

The lack of liquidity in the student loan marketplace is affecting private loan availability. Some students and parents could see more stringent credit requirements and higher interest rates. Private loans have no federal guarantee, or government-backed insurance against default, and so lenders have become more skittish to lend these loans to borrowers with less than perfect credit or who attend institutions with higher default rates and lower graduation rates. As always, students should be advised to exhaust all federal loan options first, and turning to private loans should be a last resort. Federal loans (Stafford and GRAD PLUS) do not require credit checks, have fixed low interest rates set by the government, and offer more generous repayment options. PLUS parent loans do require credit checks, but the criteria are less stringent than for private loans.

Some of my students who were planning to borrow private loans say that their lenders have stopped offering loans at the last minute. What happened, and how can I help these students?

Some non-profit lenders are finding it particularly difficult to secure what’s called “bridge funding,” or short-term capital, to make loans before they can in turn sell the loans to the Department of Education or other investors.

While your students may have been drawn to private loans from non-profit lenders due to their low interest rates and easy application processes, federal loans are still the strongest option for many students. In most cases, students who qualified for private loans will be eligible for federal Stafford loans or Grad PLUS loans, and parents who qualified for private loans will likely qualify for Parent PLUS loans.

Lastly, students can cut back on their need for private loans by budgeting more carefully and reducing their expenses. Living at home, forgoing a car in favor of public transportation, trimming their spending allotment, forgoing cable, and opting for a lower-cost cell phone plan are all ways to minimize costs and help make college more affordable.

I have students who wish to consolidate their student loans, but I’m hearing that consolidation isn’t offered anymore. Is that true?

Some lenders have stopped offering Federal Consolidation Loans because they are no longer profitable. However, one of the biggest benefits of consolidation for students was a low fixed interest rate. All federal loans originated since 2006 already have a fixed interest rate and so the benefit, depending on the circumstances, may be negligible. If the student’s lender no longer offers consolidation, but the student still wants the ease of 1 monthly payment, they can simply ask their lender for a combined bill.

If the student has loans with multiple lenders and/or loans originated before 2006, which still carry variable rates that are reset every July 1, he should contact his lender to see if it still offers consolidation. If not, the student has the option of consolidating his loans with another lender that does offer consolidation, or through the Federal Direct Loan Program. Visit American Student Assistance’s Loan Consolidation page and the Federal Student Aid site for more information.

What’s this “Lender of Last Resort” program I keep hearing about?

The Lender of Last Resort is a “safety net” provision in the FFELP that will ensure all eligible students and parents receive federal college loans. Under federal law, in the event an otherwise eligible student is unable to find a willing lender, the guaranty agency in the state where the student’s school is located will help the student secure a federal loan. American Student Assistance will administer the LLR program in Massachusetts and D.C.. However, it is important to remember that we do not anticipate the need to implement LLR on a wide scale. We are optimistic that most families will be able to secure federal loans through the normal channels.