Student Loans Feel the Crunch

Credit market constriction is limiting the financial aid available to college students. Here are some tips for shopping for a private loan

by Alison Damast

The college acceptance letters are coming in, and for many families the search for student loans is just beginning. For this year's crop of students, however, shopping for a loan, especially a private student loan, can be more difficult than usual because of turmoil in the credit markets (BusinessWeek.com, 1/17/08).

In the past few months, dozens of lenders have announced they are suspending some of their student loan programs or, in some instances, eliminating them entirely. The financial aid Web site FinAid.org, reports that 37 education lenders have exited or suspended their participation in all or part of the federally guaranteed Federal Family Education Loan Program. The outlook is grim for private lenders as well. Eleven lenders have suspended their private student loan programs, and seven nonprofit state loan agencies are also halting some programs.

"We're not trying to put fear into family and students' minds…but I think people will have to start earlier and work harder to ensure they can get the level of student loan they need," says Brett Lief, president of the National Council of Higher Education Loan Programs, a group that represents guarantee agencies and nonprofit lenders.

Caught By Surprise

The situation—a combination of the collapse of a previously obscure corner of the financial market known as auction rate securities and fallout from the subprime mortgage crisis—has gotten so dire the future of the student loan industry appears, for the first time, precarious. Last week, the Education Dept. issued guidelines for "lender-of-last-resort" programs, a stopgap measure that will ensure certain students can obtain loans in the case of the government announcing a loan emergency.

Bob Giannino-Racine, executive director of ACCESS, a Boston nonprofit that helps low-income student and families find loans, says he and others in the industry have been caught off guard by the rapid unraveling of the market. "It probably shouldn't have, but that issue caught a lot of us by surprise over the last few weeks," Giannino-Racine says. "If this is as big a problem as it seems, it could hit us like a ton of bricks."

Financial aid counselors are concerned as well. In a Mar. 25 letter to the Senate and House education committees, Philip Day Jr., the president of the National Association of Student Financial Aid Administrators, urged legislators to take action to ensure students have guaranteed access to loans this fall. His organization has "considerable apprehension about the future of student lending," he wrote. In the letter, he pointed out that more banks that make government-guaranteed student loans are leaving the market every day, including, most recently, HSBC (HBC), M&T Bank (MTB), and TCF Financial (TCB). On Mar. 27, Salt Lake City-based Zions Bank (ZION) announced it plans to withdraw from the federal student lending program as of Mar. 31.

Tips for Loan Shopping

In this shaky lending landscape, a student seeking a loan might be tempted to take the first offer that comes along. But taking the time to research and compare offers is well worth it. This practice is even more important in the private loan market, where interest rates and repayment options vary widely.

Keep the following tips about private student loans in mind as you explore the student loan market this season.