The anxiety and uncertainty of the financial marketplace has extended to virtually every economic sector. The student loan market is one of them.
Banks are becoming increasingly hesitant to write mortgage loans to anybody but the most qualified of applicants. After all, it was the crisis in the housing industry that has left the credit pool as shallow as it has been in the modern era. Lenders are disappearing, and borrowers are left scrambling.
As for what this means for the availability of student loans for the upcoming academic year, this much is certain: Federal student loans, like the Stafford and PLUS loans, for 2008-09 will be available. Those are the safer loans banks make to students because they are guaranteed. Stafford and PLUS loans are more attractive to student borrowers, too, because of their lower interest rates than private loans.
And it is the private loan sector that could experience the most damage from the flailing credit market.
“Student loans are here to stay,” said Bob Murray, vice president of corporate communications for USA Funds, the agency that serves as a guarantor of federal student loans for students attending Mississippi universities and community colleges. “Rising tuition costs will make sure of it.
“While the private market for student loans has grown rapidly over the years, it’s shrinking considerably now and is offering less flexibility for borrowers.”
Since the issues arose with the credit market, Murray said lender costs have “gone through the roof.” He added that some borrower benefits — like waived application fees and set interest rates — are things of the past in the private loan arena.
“Due to all this, we’ve had about 50 lenders suspend their student loan programs, or quit participating all together,” Murray said. “That represents about 12% to 16% of the total loan volume.
“Families are asking if loans will be available this fall. Major banks have shown they’re in for at least this year.”
One of those banks who has operations in Mississippi is Regions. The Birmingham, Ala.-based bank will, according to its Web site, offer federal Stafford and PLUS loans for the 2008-09 academic year. Regions spokesman Mel Campbell said his bank is definitely in, and will even expand its student loan product lines.
“Our approach to credit and lending is really based on the ability to make loans through all the credit cycles,” Campbell said. “We’re expanding what we offer as far as student loans, even making loans in the private market, making direct loans.”
One possibility Murray mentioned was that banks in Mississippi will only lend money to students attending school in Mississippi. But he said the prognosis is not all doom and gloom.
Congress has taken notice and has passed several measures, like the College Cost Reduction Act, that aims to lower interest rates attached to student loans.
Earlier this month, Congress passed legislation, which President Bush has promised to sign into law, that will help lenders obtain the financing needed to fund federal student loans. The Ensuring Continued Access to Student Loans Act includes a provision that would permit the U.S. secretary of education to purchase existing loans from lenders.
Also, the bill increases by $2,000 annual limits on unsubsidized Stafford loans for undergraduates and also increases lifetime limits on the amounts undergraduates can borrow in Stafford loans. It would make PLUS loans more attractive by providing a six-month grace period after their child leaves college before parents would have to begin paying back the loan and by permitting PLUS loan borrowers with adverse credit to still qualify for PLUS loans if they are significantly past due on mortgage or medical payments or less than 90 days past due on other debt payments.
“There is reason for a bit of optimism,” Murray said. But students and their families should start planning early, and not wait until after high school graduation to begin the process of securing money for the first year of college. “It actually needs to begin in the first year or two of high school. We tell families that all the time.”
Contact MBJ staff writer Clay Chandler at clay.chandler@ msbusiness.com .