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Some lenders have already cut back on federal student loans, and more may follow. Congress trimmed lenders' profits last year by reducing their federal subsidies by about $20 billion. That, combined with higher costs of funds, has persuaded some lenders to stop making certain federal loans or to concentrate on the private loan market. (Unlike federal loans, private loan rates aren't fixed and can range up to 19%. These loans grew in a single decade from less than 5% of the student loan market to more than 20%.)
"Tens of thousands of students are expecting to go back to the lender they used last year, and those lenders won't be available," SimpleTuition's Walker said. "They will be confused, and there will be a scramble (to find lenders) right as the bills are due."
Many lenders are becoming pickier about who gets money. Some lenders are signaling they may loan less, or nothing, to institutions that don't have a high graduation rate, such as for-profit and vocational schools. The notion here is pretty simple: Education works to boost your income only if you actually get a degree, and folks who fall short of that mark may not make enough to pay back the loans.
"They're saying, 'We want to focus on making loans to people who are going to graduate, instead of people who are just going to school,'" Walker said. That means schools with relatively high dropout rates "are going to feel pinched."
That might save some people from racking up tens of thousands of dollars of debt they can't repay and can't shed (unlike many other unsecured debts, student loans typically can't be erased in bankruptcy court). But it may cost others "the opportunity to do something they've always wanted to do," Walker said.
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Another significant change has to do with credit scores. Federal student loan programs typically don't use credit information, but most private lenders in the past have required a minimum FICO credit score of 675, Walker said. (The traditional start of the subprime market, by contrast, is 620 on the 300-to-850 FICO scale.)
"Now they're tightening up lending criteria so that instead of 675, 695 will be the minimum," Walker said.
In addition, lenders are likely to add fees that reflect borrowers' creditworthiness. Though people with the best credit scores might pay no fees, Kantrowitz said, those with shakier credit could pay fees of 3% to 10% for a loan.
3 ways to cope
Clearly, it's a new world for student borrowers. So what's a college-bound student to do? Here's your game plan:Don't procrastinate. As soon as you get your financial-aid letter in the mail, start investigating possible lenders. Remember to exhaust federal student loans before turning to the private market, since federal student loans have fixed rates and are more flexible than private loans.
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Oops! Forgot to save for collegeNeed help paying your kids' tuition? It's time for them to start taking some financial responsibility for their education.
Bug your financial-aid office for advice. Some aid officials got black eyes for steering students to certain lenders in exchange for kickbacks. But financial-aid offices are still the best place to go, Walker said, to get the scoop about which lenders are available and which aren't.
Get a co-signer. If you have to use private loans -- and many students do because the most you can borrow in federal loans for an undergraduate education is $23,000 ($46,000 if you're an independent student or a dependent student whose parents have been denied PLUS loans) -- burnish those credit scores or get a co-signer who already has. A co-signer with great credit can help you avoid fees and win a much better rate on your loans, which can save you thousands of dollars.
Published Feb. 21, 2008
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