Student Loans In A Time Of Credit Crisis

[Jul 18, 2008.]

The recent credit crisis in America's hasn't just affected subprime lenders. Through a ripple effect, it has left many financial institutions struggling. This includes those financial institutions that specialize in providing federally-subsidized student loans. Many student loan institutions are having trouble coming up with the capital necessary to finance the federal student loans they have already given out.

Meanwhile, US Congress passed the College Cost Reduction and Access Act in 2007. By reducing the cost of college education, this act also reduces the revenue financial institutions receive from individual student loans. As a consequence, many of the smaller lenders are have had to stop dealing in federally-subsidized loans entirely. Even a giant like Sallie May has had to struggle with its $17.6 billion worth of federal loan transactions.

Now, the federal government is finally stepping in to subsidize those loans. The Department of Education has created government organizations to lend money to the private lenders themselves, thus helping them finance the federally-guaranteed loans that they traffic in. This guarantees that every student who qualifies for the Stafford and other federally-backed loans will receive them.

Federally-subsidized loans, lent to students and their families through companies like Sallie May, have always been a better deal than most private loans. Because the lender is guaranteed by the federal government that it will get its money back even if the student defaults, these loans have a significantly lower interest rate. Plus, the interest rate stays the same over time--a reasonable rate of approximately 6.5% for most Stafford Loans and approximately 8.5% for most PLUS Loans. Furthermore, these loans have payment options for the borrower that most non-federally-backed private lenders simply can't afford to give.

Now, as the lenders are trying to recover from the recent crisis, federally subsidized student loans are going to be sending more students through college than ever before

The government has increased the maximum amount of financial aid a student can receive from an unsubsidized Stafford Loan to $5,500 for freshmen, $6,500 for sophomores, and $7,500 for upperclassmen (unsubsidized Stafford Loans are simply Stafford Loans that begin accumulating interest as soon as they are taken out--rather than six months after college graduation for subsidized Stafford Loans, whose interest is paid for by the federal government prior to that time). This represents an increase of $2,000 to the limit for maximum borrowing.

Moreover, PLUS Loans have become less strict about the credit history students' parents must have to qualify for the loan. As long as the borrower has never been delinquent in making payments on their home by more than six months--and as long as the borrower has paid all other previous debts no more than three months late--he or she could qualify for a PLUS Loan to send his or her child to college.

Plus , an increasing number of educational institutions are using the Federal Direct Loan Program. This program lets the government pay the schools directly for a students' education; then, the student has to pay the government back. No third party is involved in the transaction.