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.
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.
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?):
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.
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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.