This week it was announced that
student loan lenders are being squeezed by a credit crunch. The subprime
home loan woes have now affected the education lending industry. The
lenders are having difficulty securitizing and selling these loans due to fear
in the market. Fully two thirds of students graduate with loan
debt. The high cost of college and relatively low annual limits on
federal student loans lead students to seek out private loans to fill in the
gap. According to College Board, almost
one quarter of students that borrow have private loans (versus 6% ten years
ago.)
Banks have created their own
"alternative" education loans which are not guaranteed by the
government and do not have the same low caps or consumer protections the
federal loans offer. These private loans generate significantly more
profits to the lender than the federal versions. One problem is that many
times the student ends up with a private loan when they could have applied for
a federal loan first. Many financial aid officers are unaware of the
chasm that exists between rates and terms of the federal versus private loans.
I cannot tell you how many times
clients have come into our office with their loan documents showing us their
"federal" loans and, to their dismay, find out they took out private
loans instead with horrible terms. Most of these loans have variable
rather than fixed interest rates - some as high as credit card rates (we’ve
seen 20% +)! The private lenders have marketed and packaged these
alternative loans to the point where the consumer can’t distinguish them from
the federal loans.
So
the credit crunch is bad news for borrowers. Lenders are already pulling
out of the market for both federal and private loans. (They are pulling
out of the federal program because their government subsidies were cut late
last year.) Those that continue to lend will reduce discounts on
origination fees and interest rate discounts; rates will more than likely rise,
by at least 1% due to the fact that the bundles of loans will continue to have
problems being securitized on Wall Street. Variable rates that should be
coming down in a low interest rate environment will be moving in the opposite
direction which will put further pressure on the American consumer who is
attempting to keep their head above water in what appears to be a recessionary
environment.
I
am interested in hearing from any of you as to whether or not you have
experienced your clients being stuck with any of these less-than-consumer-friendly
private education loans. I am collecting
case studies for a white paper we are compiling.
Deborah
Fox
Founder,
Fox College Funding