Students attending college this fall may find themselves scrambling for resources if some lenders continue to exit the student loan business. Private lenders report a slight increase in defaults on unsecured student loans partly because of the soft econom
The default rate is bad newsûand bad businessûfor the lenders. In 2005, the last year for which statistics were available, the Department of Education reported default rates for private loans at 4.6 percent.
“Students are finding out that the job market is not what it use to be and many graduates are either unemployed or underemployed a year after graduation,” said Timothy Snow, senior mortgage banker at LaSalle Bank.
“With the way the economy is right now, people are not able to pay their mortgages, car notes or repay student loans.” Among the lenders leaving the student loan business are the New York-based College Board and the College Loan Corp. in Poway, Calif. The Pennsylvania Higher Education Assistance Agency temporarily suspended its lending activities through federally guaranteed student loans.
The credit crunch and tightening lending standards mean lenders are more selective. “Students will have to have better credit because students without good credit histories or no credit might have a problem accessing some private student loans,” said Tamora Jones, a senior loan officer at Harris Bank in Chicago.
“So now private lenders are redesigning their private loans.” The grim news mostly affects private lenders. Federal borrowing, for now, is unaffected. Federal student loans such as Stafford and Parent Loans for Undergraduate Students have lower interest rates and longer repayment terms, while private student loans often cost more because lending institutions determine their own rates and credit requirements.
Stafford and PLUS loans are guaranteed by the Department of Education while loans from private lenders are not. Despite growing concerns, Department of Education officials said that there won’t be a federal loan shortage.
“Federal student aid will continue to be available,” said U.S. Secretary of Education Margaret Spellings. She added that the Department is monitoring the situation to prepare for any significant shift in loan volume. With the average tuition at a private, four-year college costing $24,000 a year, according to the U.S. Department of Education, attending college may become iffy for some.
A Department of Education spokesman noted students sought $148 billion in financial aid during the 2006-2007 academic school year. Merrill Lynch & Co. Economist Darryl Banks said the economy is spinning out of control, as a recession looms.
“No one wants to admit it but we are in the beginning stages of a recession and no one is exempt including college students,” he said. “I suggest parents with children small children open a college savings plan if they have not done so because the cost of college will continue to rise with cost of living.”
And for parents who have high school children and no college savings plan in place, he added, “good luck.” The private lender crunch has some graduating high school seniors rethinking their college plans.
“I got accepted to Fisk University [a Historically Black College in Nashville, Tenn.] and plan to study accounting. But now I am not so sure,” said Trisha Manley, 17, a senior at John Marshall High School on the West Side.
“My mother is already working two jobs to take care of me and my two little brothers, so I know she cannot do anymore if I cannot borrow enough money to cover the costs.” Neal Burrell, 18, a senior at Tilden High School on the South Side, will attend Marquette University in Milwaukee this fall. Like so many seniors he is determining how to pay for college.
“Many Black students do not come from well off households and are not necessarily straight ‘A’ students but are college material,” he said. “My mother is a cashier at a grocery store and my dad is a security guard, so it is up to me to figure out just how I will pay for college.”
Leo Catholic High School senior Devon Simpson, 18, received a partial scholarship that will pay for his tuition but not cover the annual $4,500 tab needed for housing. “I will be attending Morehouse College in Atlanta this fall on a music scholarship but I will still need to take out a loan,” he said.
“I only hope that my loan is big enough to cover this cost because without it I most likely will have to attend a college here.” At least one local school does not expect student enrollment to be affected because most of its students do not use private loans.
“Not that our students are rich but most students here do not use private loans but the [William D. Ford] Direct Loan Program, which are federally- funded loans,” said John Holden, director of media relations for DePaul, who added that the annual cost to attend DePaul is around $20,000.
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