Doing the student loan shuffle

a piggy bank with a college on top of it
  • Private loans are tough to find, especially for those with bad credit.
  • Federal loans are available because they are less risky for lenders.
  • Alternative options such as peer-to-peer lending also exist.

Many months into the credit crisis, times remain tough for many student-loan seekers. But hopeful signs of a thaw are emerging.

Students who rely on private student loans continue to see their options dwindle. Several of the nation's largest banks have either shut down or significantly reduced their private student loan programs.

Still, the news isn't all bad. Recently, the private student loan market has shown some small signs of life.

"(Investors) are still staying away, but there are some promising signs," says Mark Kantrowitz, publisher of the financial aid Web site and the scholarship search service

Meanwhile, families seeking federal loans are finding success. One bright spot in particular has been the large-scale implementation of the federal Ensuring Continued Access to Student Loans Act of 2008.

ECASLA has kept Stafford and PLUS loans flowing to students despite the trouble in the financial industry, says Jason Delisle, research director for the education policy program at the New America Foundation, a public policy think-tank in Washington, D.C.

"It is fully in place, and lenders are taking full advantage of it," Delisle says. "Financing for the majority of federal student loans are being made through that program."

The state of student loans
  1. Private loans still scarce.
  2. Federal loans still available.
  3. Stafford loan have risen.
  4. Some fall through cracks.
  5. Alternative options.

Private loans still scarce

The Project on Student Debt, a Washington, D.C.-based nonprofit agency dedicated to curbing student loan debt, estimates that 14 percent of all undergraduate students currently rely on private loans to foot at least some of their college bill.

In recent months, private loans have become difficult to find, especially for students and families with bruised credit.

"Universally, lenders have stopped making loans to people with FICO scores under 650," says Kantrowitz "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 have backed out is the continued fallout from 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. Before the credit crisis, they could take out short-term loans with credit warehousing facilities. Once the lender had amassed a significant number of loans -- at least $100 million worth, according to Kantrowitz -- the loans were 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 says. "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."

Kantrowitz offers the example of the College Loan Corporation, which saw Citigroup refuse to increase its warehousing facility to accommodate new lending. As a result, College Loan Corporation stopped offering new private student loans.

Despite such gloomy developments, the private student loan market has begun to perk up a bit recently, Kantrowitz says.


"Sallie Mae did a $1.5 billion deal with Goldman Sachs, and there's been talk of Sallie Mae bringing a private student loan securitization to market," he says. "Also, Sallie Mae made some changes in their private student loan program that may ultimately make it easier to securitize private student loans, despite the current icy capital markets."

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.

Passage of ECASLA has given federal loans a new boost. The legislation increases the Stafford loan limit to $31,000 total, boosting the amount students can borrow each year by $2,000. It also offers new, more flexible payment options and helps borrowers with damaged credit to get PLUS loans.

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