Credit Calamity Impacts Student Loans

Francine L. Huff
LoanBiz Columnist

The nation's credit sources are drying up -- and it's beginning to cause problems in the student loan market.  Some smaller lenders say their primary source of funding for private student loans is disappearing as investors shy away from securities backed by the loans. The upshot is that borrowers may have to search harder to find a lender -- and favorable terms.

Tougher Student Loan Requirements

As college costs continue to rise, many families rely on private student loans to help pay education costs not covered by federal loans. Because of the tough economy, students looking for private loans may also need to have their parents co-sign. Some experts say lenders are expected to raise the minimum credit score required to qualify to 650, and students will have to more adequately demonstrate that they or their families have enough income to repay the loans.

Private Student Loan Interest Rates May Rise

Some small lenders are expected to raise interest rates on private student loans by as much as 1%. Borrowers already pay more for private loans, which carry interest rates as high as 13% for the 2008-09 school year, Mark Kantrowitz of FinAid.org told CNNMoney. The federal student loan rate is set by the government each year and is at 6%.

Federal Student Loans Affected

It's not just the private loan market that's being affected. Some small lenders are choosing to exit the federal student loan business, which is they see as less profitable, to focus on private loans. Others will no longer waive origination fees on federal loans and will end discounts to borrowers when they begin repaying them.

However, it's not just small lenders that are getting tough with student loans. Sallie Mae, the biggest lender to college students in the U.S., said it will stop approving private student loans to subprime borrowers who pose more credit risk. That move is expected to hit for-profit education companies especially hard.

Students looking for financial aid need to begin researching all their options early. Borrowers who think they'll need private loans should work to repair any problems on their credit history and raise their credit scores well in advance of submitting an application. They also need to carefully compare all the terms of any loans they're considering to make sure they get the best deal.

Sources
CNNMoney
"Loan crisis goes to college," by Tami Luhby, www.cnnmoney.com.
Chicago Tribune
"Rules for student loans get tighter," by Ameet Sachdev, www.chicagotribune.com.

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.