Private Student Loan Difficulties
The widening sub prime mortgage crisis has snared another traditionally safe corner of the credit markets: private student loans. Many parents and students lining up college financing this spring will find fewer companies offering loans and, for private student loans, more stringent lending criteria and higher interest rates and fees.
Unlike federal loans, whose interest rates are capped by law, private student loans—offered through banks, credit unions, and other lenders—typically charge variable rates tied to credit scores. Students taking out these loans could see their rates rise by half a percentage point to a full point.
Why are private loans feeling the pinch? Like mortgages, some private student loans are bundled and sold on a secondary market, where they are used to fund new loans. However, skittish buyers are not biting, and some lenders are having a hard time raising enough cash to keep making loans. Unlike with federally backed loans, no one is serving as the backstop for defaults, so investors are worried that these bundles of loans will not turn out to be safe. Meanwhile, lenders are also coping with a new law that limits federal subsidies on government-backed student loans. As a result, some lenders have scaled back on the types of private student loans they offer. Others have taken action that is more dramatic by stopping private student loans all together.
Growth spurt. Private student loans are the fastest growing segment of the student loan finance market. In 2005-06, students took out $17.3 billion in private student loans, compared with only $1.3 billion a decade earlier, according to the College Board.
Aside from raising interest rates, lenders of private student loans are toughening their standards. The nation’s largest private student lender, Sallie Mae, recently announced that it is no longer providing private student loans to students whose credit ratings are below prime. Lenders are likely to require a credit score of at least 650 to secure a private student loan, up from a previous requirement of 620. Students with no credit history will also run into roadblocks. A 20-year-old with no credit and no cosigner is going to find that rates will be quite a bit higher.
But do not lose heart. Were there is a will there is a way. Your education is a very important part of your career for the future. There are many different options that will work for you. First of all, do not forget about the federal student loan programs. Check them out first and get all you are available to receive. Only use a private student loan if you have too.
If you decide you do need to apply for a private student loan. Talk with your parents or grandparents. With their good credit history your troubles will be few. Keep in mind you are working off of someone else’s good credit, so you must be mature about how you handle it.
Your in college so it is time to step up to the plate and act like an adult. Go get em!
