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Private Student Loan Borrowers Face Tougher Scrutiny

Francine L. Huff
LoanBiz Columnist

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Qualifying for a private student loan is getting tougher as more banks tighten lending standards for borrowers. Some people who previously qualified for these loans may find themselves facing tougher scrutiny of their credit and possibly paying higher student loan rates. Here's a rundown of some of the changes students and their parents need to be aware of.

Higher Interest Rates

Private student loans are usually used to make up a shortfall in financial aid through government programs. Borrowers generally pay higher student loan interest than with federal loans and may even need a cosigner to qualify for the best rates, which are often variable. A survey by the National Consumer Law Center found that the average initial APR for private student loans was 11.5%. Students who have low credit ratings or attend colleges with low graduation rates may find it more difficult to qualify for private student loans.

That's bad news for a lot of students. For the 2006-07 school year students and parents borrowed an estimated $17.1 billion in the form of private student loans, the College Board told the Wall Street Journal. That's about 24% of U.S. total education loan volume according to the National Consumer Law Center.

Loans Aren't as Profitable

In the past private student loans have paid off well for lenders because loan originators would package the loans to sell to investors. But some of these loans are so expensive they are no longer as profitable to lenders. As a result, some lenders have stopped making or cut back on loans in private student loan markets. Federal student loan programs are also taking a hit as federal subsidies have been cut. Recently, Education Resources Institute, Inc., the nation's largest insurer of private student loans, filed for bankruptcy court protection.

What Students Can Expect

Students who do qualify for private loans may end up paying higher interest and loan origination fees. Private loan interest rates have been on the rise and are expected to continue climbing, Mark Kantrowitz, publisher of FinAid.org told the Wall Street Journal. He also said borrowers with credit scores below 650 may have a tough time qualifying for a loan at all. Other students who may not qualify include those who attend schools with high loan-default and low graduation rates. Even if students do receive private student loans they probably will not be offered options for flexible repayments, forbearance, or deferment.

Sources
Wall Street Journal
"Credit Crunch Hits Private Student Loans," by Robert Tomsho and Keith Weinsten, www.wsj.com
National Consumer Law Center

"Paying the Price: The High Cost of Private Student Loans and the Dangers for Student Borrowers," by National Consumer Law Center, www.consumerlaw.org.


About the Author
Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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