|
For students heading to college this fall, getting
financial aid will be a good lesson in money management. It may
be tricky to find loans, and the landscape seems to change from
one week to the next.
For many borrowers, private loans will be hard to
get. That's because several of the nation's largest banks have either
shut down or significantly reduced their private student loan programs.
Last April, The Education Resources Institute, or TERI, -- the nation's largest nonprofit student loan guarantor -- filed for
Chapter 11 bankruptcy, pulling even more private lenders out of the student loan market for the upcoming 2008-2009 school year. According
to the Project on Student Debt, a Washington, D.C.-based nonprofit agency dedicated to curbing student loan debt, that could mean
"bye-bye loan" for the 8 percent of all undergraduate students currently relying on private loans to foot some, if not all, of their
college expenses.
 |
| The state of student loans |
|
|
|
|
Private loans drying up
"Universally, lenders have stopped making loans to people with FICO scores under 650," says Mark Kantrowitz, publisher of the financial
aid Web site Finaid.org. "That's essentially eliminating 10 percent of the pool that
was previously being approved. My best guess is that 100,000 families at least are going to be denied private student loans that previously
would have been eligible for them."
The primary reason lenders are backing out is because of turbulence in the credit market due to the subprime mortgage
crisis. To finance a student loan, most lenders, especially nonbank lenders that don't have customer deposits to rely on, don't front
the money themselves. They take out short-term loans with credit warehousing facilities. Once the lender has amassed a significant number
of loans -- at least $100 million worth, according to Kantrowitz -- the loans are securitized and sold to investors at a premium.
"They do that because credit warehousing facilities are very expensive, and by using investors, it's actually a cheaper
source of funds," Kantrowitz explains. "Unfortunately, when securitized subprime mortgage loans started defaulting, investors pulled out
of all forms of securitization, including student loans. With the capital markets no longer being a source of funds, these lenders don't
have money coming from anywhere, so a lot of them had to stop doing private student loans."
Federal loans still available
Families taking out federal loans, including the Stafford and PLUS loans, are in a safer position, explains Sallie Mae spokesman Conwey
Casillas.
Unlike private loans, federal loans are backed by the U.S. Treasury, making them guaranteed safe investments for lenders
who can front the cash. Although a number of smaller nonbank lenders have pulled out of offering federal loans due to problems coming up
with the upfront capital, recent legislation allows lenders to sell loans to the U.S. government.
"Instead of using the capital market to raise funds to make new loans, lenders can now sell them to the government and
proceeds from that sale would go to fund new loans for the upcoming year," says Casillas.
|
