If you want to borrow a lot of money for college, you are not going to like what the mortgage mess is doing to you. The credit crunch has spread like a disease, infecting a broad range of loans.
If you want to borrow a lot of money for college, you are not going to like what the mortgage mess is doing to you.
The credit crunch, which started with a panic over people missing home-loan payments several months ago, has spread like a disease, infecting a broad range of loans. Now it may poison opportunities for college students to obtain some loans and is adding painfully high interest costs to many.
So far federal student loans, or the low-interest college loans offered under government rules, are still plentiful. Students who get Stafford loans pay 6.8 percent interest, which is relatively low compared with other loans available for college.
But concerns developed recently because some lenders have decided to stop giving out student loans. The lenders reached the decision because they had trouble borrowing money themselves. And they need to borrow money in order to lend money to students.
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The issues sprang from mortgage problems. As homeowners have been missing payments, banks and other lenders have taken billions of dollars in losses.
Lenders have become gun-shy, fearful that if they lend money they won’t be paid, and concerned because bond investors won’t buy the packages of loan payments that are critical in funding new loans.
These investors are aware that during the last few years, lending practices became sloppy. They aren’t sure what loans to trust and what loans are suspect. As a result, the process of handing out money — whether to homebuyers, college students or car buyers — has been paralyzed.
Until lenders and investors start feeling safe again, they are expected to hold on tightly to money. That could mean that students who seek loans may have difficulty. They might have to turn more to higher-interest private loans. And in this environment, families without good credit could be turned away or charged a lot, said Mark Kantrowitz, publisher of FinAid.org.
The federal government is trying to reassure students. A spokesman for the Department of Education said that if there is any slack in lending, it will step in by granting more loans at the 6.8 percent rate.
But the spokesman said, “The department is concerned the benefits of the (Federal Family Education Loan program) could diminish as a result of fewer lender participants.”
In other words, it’s possible the government wouldn’t be able to pick up all the slack if the credit crunch lasts long.
To appreciate this, you must understand that students receive federal Stafford loans in two ways. About 20 percent come from the government directly. The other 80 percent come from lenders who follow government rules, such as charging no more than 6.8 percent interest. But those lenders depend on borrowing money. The government doesn’t have to borrow money from any source but the U.S. Treasury.
Financial-aid experts suggest that families immediately fill out their FAFSA forms, the financial-aid forms students must complete, along with a tax return for their family, in order to qualify for a low-interest federal loan. That way a student may qualify early for aid instead of taking a chance on a shortage later. Although students should seek lower-interest federal loans before turning to higher-interest private loans, many will be burdened by the higher private-loan costs, Kantrowitz said.
Under federal rules, students in their first year of college can borrow only $3,500 in Stafford loans. Yet public universities often charge about $18,000 a year for housing, food, tuition and other fees. Private colleges can exceed $40,000 a year. Even in their junior and senior years, students can’t borrow more than $5,500 with Stafford loans.
To make up for the difference, Kantrowitz says, parents can take out federal PLUS loans, at an 8.5 percent interest rate. But he said they may run up against tougher lending standards. Although parents aren’t turned away based on credit scores, if they have defaulted on other loans, they won’t qualify. For more information, go to: www.finaid.org/loans/creditcrisis.phtml.