Credit woes hit student loans

Private lender cutbacks have colleges concerned

Mon, Mar 10, 2008

College financial-aid experts have advice for families worried the credit crunch caused by the subprime-mortgage fiasco has now spread to the college-loan sector:

Don’t panic - yet.

The entire U.S. credit system has tightened up due to the collapse of the subprime-mortgage market. Major financial firms, reeling from subprime aftershocks, are balking at major loan commitments until markets calm down.

Now many private banks and other lenders are backing off making loans to parents and students to pay for college tuitions and other higher-ed expenses.

The New Hampshire Higher Education Assistance Foundation said last week that it will cease some lending due to increasing costs on its auction-rate debt used to finance its student loans.

The Pennsylvania Higher Education Assistance Agency decided to halt its loan activity - also because of turmoil in the markets.

And locally, colleges say private lenders are telling them they won’t be making loans this year.

“We’re noticing some lenders pulling out,” said Bernard Pekala, director of student financial strategy at Boston College.

With fewer lenders at hand, some students and parents may find it harder to get private loans, and may end up paying higher interest rates when they do nab such loans. Students looking for aid to attend community colleges and vocational training schools - generally from less well-to-to households - are especially vulnerable to being turned away.

But financial-aid experts say there are still plenty of non-private college loan packages out there, backed by the federal government and insulated from today’s market chaos.

There’s the Direct Loan Program in which the U.S. Treasury provides loans directly to students and parents.

There’s also the Federal Family Education Loan program in which the federal government backs up private-sector college loans.

Neither federal program will dry up, and about $75 billion in federally backed loans are expected to be issued this coming fiscal year.

But there are hitches.

One of the more popular federally backed products, the so-called Stafford Loans, limit total loans per student to $23,000 over four years. If a student is not a dependent of a parent, the limit rises to $46,000.

Out that’s not nearly enough to cover higher-ed costs at a time when tuitions at some private colleges exceed $40,000 a year.

Source:
http://news.bostonherald.com/business/general/