How to stay afloat when student loans sink

Wednesday, April 23, 2008

Since I wrote my story two weeks ago on how families should deal with the credit crunch in student loans, things have gone from bad to worse.

Bank of America announced it will stop making private student loans and "renewed its commitment to providing government-backed student loans."

Student Loan Corp. is suspending lending to certain schools and withdrawing from the federal consolidation loan program.

The largest student loan lender, Sallie Mae, said it will no longer offer federal consolidation loans, which enable students to combine student loans into one with a fixed interest rate. The environment for student loans is "continuing to get worse, and there's no sign of any improvement," said college financing expert Mark Kantrowitz, who runs FinAid.org. The subprime mortgage meltdown and the ensuing credit crunch have slowed lending and cooled investor interest in securities, including those backed by student loans. Thus, it has become more difficult for some lenders to raise money for loans.

Those who have student loans and want to consolidate should look to the federal direct consolidation program at loanconsolidation.ed.gov, Mr. Kantrowitz said.

"I expect that federal direct consolidation loan volume will be more than four times last year's volume and more than twice the previous peak annual loan volume," he said.

Officials at the U.S. Department of Education said they're prepared to deal with the higher demand. "The department is aware that its Direct Loan Program may see an upturn in the number of student loan consolidation applications it may receive," said spokeswoman Samara Yudof. "The department is preparing to handle increases in direct consolidation loan applications in a prompt and accurate manner."

Families seeking financial aid for the upcoming 2008-'09 academic year shouldn't be discouraged. "We don't want families to overreact right now," said Kevin Bruns, executive director of America's Student Loan Providers, which represents private, nonprofit and state-based education and financial organizations that provide federally guaranteed student loans. "What would be a real tragedy is if families made decisions on where their kids will go to college based on their worry about the access to federal student loans."

The first place families needing help should contact is a school's financial aid office. "The financial aid directors have been working hard to line up additional lenders if a lender has decided not to make any loans," Mr. Bruns said. "The university where their child has been accepted may have enough lenders lined up to make all the loans that could possibly be applied for." But shop for federally backed loans first before applying for more expensive private loans. And federal loans are still available.

"What we don't know is what will happen if the conditions continue to persist in July and August, when millions of applications for student loans will be submitted," Mr. Bruns said. "There's concern that there will not be enough capital available to lenders going into the fall to meet demand."

The government needs to act quickly to fix this mess.

Students deserve the chance to achieve at the school of their choice without worrying whether they'll be able to pay for that precious education.

Congress has taken steps to lay out emergency measures that could be triggered if the student loan market gets worse.

Student loan money is still available, but you will have to look a little harder for a lender. When you apply, borrow only what you need and estimate the amount of debt you can afford. Understand your borrowing agreement, especially how interest is calculated. The payoff from a college education is enormous, and families should pursue that goal with a laser-like focus.

Source: http://www.dallasnews.com/