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Credit Crunch and Student Loans

By pdelatorre - Apr 10th, 2008 at 1:59 pm EDT

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Tags: college affordability, Congress, credit crunch, financial aid, Higher Education, Recession, student debt, student loans

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As you have probably heard, we are going through some rocky financial times. A “credit-crunch” fueled recession means that many financial institutions will have a harder time making ends meet, and this, of course, includes student loan companies, as the Washington Post points out today.

Higher education advocates are worried that these lenders are exaggerating the effects of the crisis on the student loan industry as a way to secure unneeded bailouts and get back some of the wasteful subsidies that Congress cut last year in order to increase student aid. They are also worried that all of the hype will mean debt-averse students may be discouraged from “investing” in a college education. Don’t worry – it is very unlikely that you won’t be able to get the loans you need to finance you education.

Here are a few points that the Washington Post story leaves out:

Nearly 50 student lenders, including some of the industry's biggest names, have stopped issuing federally guaranteed loans in recent weeks because of paralysis in the credit markets, confronting students with higher borrowing costs just as they are starting to apply for financial assistance for the coming school year.

While some large lenders have dropped out of the guaranteed loan program (FFEL), there are still over 2,000 lenders participating. It is not even clear whether having more lenders is really better, as folks over at Higher Ed Watch noted yesterday. Even if FFEL loans become a little more expensive on average, there is a federally defined cap on interest rates.

Some colleges are already saying that their students' expected financial needs for the fall semester are outstripping what lenders are willing to provide. The industry's downturn could mean that no loans are available for a fraction of students with bad credit histories or who are attending for-profit educational institutions with poor graduation rates.

As Higher Ed Watch points out (can you tell I’m a fan?):

Despite some alarmist rhetoric in the news release accompanying the [National Association of Independent Colleges and Universities (NAICU)] report "about reductions in student loan availability," the survey confirms what we've been saying -- that there is absolutely no federal student loan crisis. Of the 315 private colleges that responded to the survey, not a single school reported having any trouble obtaining federal loans for their students.

Back to the WaPo story:

Lawmakers on Capitol Hill want to give the Education Department the authority to buy up federally backed loans from lenders, which could help thaw the frozen debt markets and rescue cash-strapped firms. Yesterday, the House Education Committee, which Miller chairs, approved such legislation with bipartisan support. A similar measure was introduced in the Senate last week.

This bill helps get us ready for an unlikely worst case scenario, and gives the few students who might be affected (students needing private loans with bad credit or attending schools with high default rates) more security by increasing borrowing limits for federal loans. For a good analysis of this bill, check out the letter that USSA & PIRG sent to the committee.

Reader Comments

Missing The Point

By FriendlyFascism Apr 11th 2008 at 8:56 am EDT

While it's true that there may be no problem today for students trying to obtain Federal Stafford (and PLUS) Loans under the FFEL program, you're ignoring the true cost of the credit crunch to these lenders. Many of the lenders in FFEL also provide private/alternative loans to students to cover the gap in funding between aid offered by their school and the cost of attending that institution. Since these are not guaranteed by the federal government, you're bound to see more restrictive credit standards this year, as funding is more difficult to get for the lenders, and an increase in fees and interest rates for loans which are approved. Even schools in the Direct Loan program will face this type of problem if their students are borrowing private loans on top of federal loans to help fund their education. When you can't come back for your senior year because you've been denied a credit-based loan, then you'll see the stark reality of the financial nightmare brought on by years of deregulation.

Re: Missing The Point

By Ben Miller Apr 11th 2008 at 9:46 am EDT

You're right in that there has been some problems with private student loans, but it's important to remember that the students being affected by these problems are attending high-cost, low-quality for-profit trade schools. These are places whose sole goal, is to get "asses in classes," to use a popular phrase. Not only are these loans going to schools of questionable validity, but they also tend to be subprime loans, in which the lender made a deal with the school to offer loans to individuals with bad credit in exchange for exclusive deals to the rest of the school's loan volume. (In fact, Sallie Mae, one of the schools that has tightened private lending standards, was actually hit with a class action lawsuit over its private lending practices.) Rather than bemoaning the loss of loans at some of these lousy schools, perhaps it should raise the question of what kind of quality control should be placed on higher education to ensure that ripoff schools aren't allowed. Maybe the lack of loans there is a sign that the market is doing this for us?

As for the issue of students at higher quality schools, there has been no evidence of a lack of private loan availability there. In addition, Congress has taken some steps to deal with the potential gap between the cost of attendance and federal aid. The legislation Pedro references included provisions to increase limits on Stafford loans (which can be taken out by undergraduates). It also changed provisions to make PLUS loans (taken out by parents in amounts up to the cost of attendance) more attractive by allowing them to defer interest payments until after graduation. Since parents' credit is considered for PLUS loans, those that are denied are then eligible for significantly higher Stafford limits. Independent students, meanwhile, can also take out more federal loans to help cover costs.

No Fax Payday Loan

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Government control...

By Payday Loan Advocate Oct 21st 2008 at 6:28 am EDT (Updated Oct 21st 2008 at 6:28 am EDT)

In the classic novel, Brave New World, author Aldous Huxley warns his readers of what could happen if the government gained total control of our daily lives. First published in 1932, Huxley wrote the book trying to imagine how his hometown of London might be in the year 2540, based on the increasing number of programs to end war, conflict, suffering, and antagonistic (aka: “free”) thought. In other words, the book is a portrayal of what the world would look like if the voice of the people was ignored, and people could not live free of the government. Huxley had and continues to have many critics. Several government programs and policies have been put into place that have structured America into a place very similar to Huxley’s 2540 London. It’s true that the communist and socialist ideals have been present in America for years, but never have these movements been too prevalent—until now. Thanks to present-day politicians, socialism and communism are creeping into U.S. government practices, which in turn, transfer our liberties into the hands of the government. As an example, elected officials have created regulations on where fast food restaurants can open up in Los Angeles. Sadly, the “man” is taking it to you and telling you that you can’t get a greasy burger and milkshake in South L.A. Even scarier are the state and national politicians that want to limit, or even eliminate, your access to fast, easy payday loans. Politicians want to win votes, and eliminating the payday loan industry is, for some reason, a good way to accomplish that goal. This necessitates action. We need to fight the against government’s ever-tightening stranglehold on our everyday lives. Post Courtesy of Personal Money StoreProfessional Blogging TeamFeed Back: 1-866-641-3406Home: Link http://personalmoneystore.com/ moneyblog/

US Economic Crisis...

By Payday Loan Advocate Oct 27th 2008 at 4:33 am EDT (Updated Oct 27th 2008 at 4:33 am EDT)

America is bemused by the current economic crisis that mortgage lending has brought on to the country. In 2008, a global economic crisis was suggested by several important indicators of economic downturn worldwide. These included high oil prices, which led to both high food prices (due to a dependence of food production on petroleum, as well as using food as an alternative to petroleum) and global inflation; a substantial credit crisis leading to the bankruptcy of large and well established investment banks as well as commercial banks in various nations around the world; increased unemployment; and the possibility of a global recession. However, Americans are not the only people affected by such matters on a daily basis. Today’s foreclosure epidemic resulted from the legal mass marketing of dangerous loan products and systematic overcharging of vulnerable consumers. Unfortunately, the consequences are hurting everyone, as massive foreclosures reverse previous gains that had been made in homeownership. Even worse, the housing crisis has set the entire country back as we deal with the spillover effects of reduced property values, lost jobs, and devastated communities. The International Herald Tribune elucidates that the worldwide credit crunch is going on in Europe as well. Small businesses depend upon credit with its suppliers in order to function. A small business owner, Dominique Boudier who runs a printing company, also depends on credit for the production of her company, and her creditors are cutting back their offerings by half. This is an order from the suppliers’ credit insurance companies. Bouldier’s business needs additional cash flow to make up for their major fallback, considering a typical 60-day lag time in which clients pay. As the bank’s hands are tied, the goods of her future seem unclear. Like many banks across Europe, her bank began to put their money to sleep with the European Central Bank instead of investing it back into other banks and the economy as a whole. When liquidity was disrupted and banks began to fail, credit began to dry up. Similar to America’s Federal Reserve Bank, the European Central Bank uses a method based on the ability to create as much fiat money as required. Fiat-money currency loses value once the government refuses to further guarantee its value. We see this in high inflation rates in this demolishing economic world we currently live in. If the banking systems are more responsible, it will, without a doubt, help solve this problem. Until that happens, payday advance loans will absolutely be a smarter alternative for consumers who need immediate short-term relief and can’t bear to wait on an irresolute central banking system.
Post Courtesy of Personal Money Store
Professional Blogging Team
Feed Back: 1-866-641-3406
Home: Link
Blog: Link

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