| More families are appealing to the federal government | | | | loans. |
| for help this year in paying for college, as parents face | | | | Even after the government passed emergency |
| a shrinking job market, record-high food and gas prices, | | | | legislation in May in the Ensuring Continued Access to |
| and tightened borrowing restrictions that have grown | | | | Student Loans Act that would allow the Department |
| out of the current credit crisis. | | | | of Education to purchase federal student loan |
| Submissions of the Free Application for Federal | | | | portfolios from FFELP lenders as a means of providing |
| Student Aid (FAFSA) are up 17 percent this year, | | | | these lenders with the capital they need to originate |
| according to a recent report released by the U.S. | | | | new student loans, FFELP lenders have simply been |
| Department of Education. Never before has the | | | | unable to come up with the money they would need |
| Education Department been bombarded with so many | | | | to fund an initial portfolio they could sell to the |
| FAFSA submissions, totaling 9 million for the | | | | government. |
| 2008–09 school year — 1.3 million more | | | | Cash-strapped and in a liquidity crunch, over 100 |
| than last year, even though only 300,000 new students | | | | FFELP lenders to date have suspended their federal |
| are expected to enter the higher education system | | | | student loan programs, leaving hundreds of thousands |
| this fall. | | | | of students and parents looking for a new lender for |
| The students who have traditionally relied on federal | | | | their federal college loans. |
| student loans to pay for college are being joined, say | | | | Fearing the increasing instability of the FFEL program, |
| financial aid experts, by over a million additional | | | | nearly 300 colleges and universities so far this year |
| students whose families have previously been able to | | | | have already applied to join the more than 4,600 |
| pay for school on their own but are now in need of | | | | schools enrolled in the Education Department’s |
| federal financial support. | | | | Direct Loan Program, through which students receive |
| “What we are seeing is more people filling out | | | | their federal parent and college loans directly from the |
| requests for financial aid,” said Richard Toomey, | | | | government rather than through a third-party FFELP |
| associated vice provost at Santa Clara University. | | | | lender. In a recent survey conducted by Student |
| “Students who haven’t needed | | | | Lending Analytics, 40 percent of college administrators |
| assistance before are coming in.” | | | | said they were contemplating the switch from the |
| As Economy Hits Student Loan Lenders, Schools Turn | | | | FFEL program to the Direct Loan Program as well. |
| to Federal Government | | | | Private Student Loans Harder to Come By |
| Typically, in the summer months before school starts, | | | | Many families who have relied on private student loans |
| student loan providers would be saturated with | | | | to supplement their federal grants and college loans |
| potential borrowers shopping for federal and private | | | | are also on the search for new lenders as providers |
| student loans. This year, in particular, with the economy | | | | of non-federal private student loans face the same |
| in a downturn and unemployment as its highest level in | | | | liquidity crunch as FFELP lenders. |
| five years, lenders would expect to be processing a | | | | Those private loan providers that haven’t yet |
| larger-than average volume of student loan | | | | suspended their private student loan programs have |
| applications for the growing number of families in need | | | | been forced to tighten their credit requirements in |
| of financial assistance — that is, if the lenders | | | | response to investor concerns. |
| weren’t being affected by the sinking economy | | | | Under these more restrictive credit criteria, the majority |
| themselves. | | | | of college students, who typically have little or no |
| Caught in the ongoing credit squeeze, a number of | | | | established credit history, will likely not be able to qualify |
| lenders of non-federal, credit-based private student | | | | for a private student loan without a co-signer. And with |
| loans have been forced to suspend their private | | | | foreclosures rising and families struggling to pay their |
| student loan programs. | | | | bills, a student’s parents or other family may not |
| And lenders of federal college loans aren’t | | | | qualify as co-signers either. Whereas last year, a |
| faring much better. | | | | student or co-signer with a credit score of 620 might |
| Last fall, Congress passed federal legislation that cut | | | | have met the minimum credit-score requirement for a |
| over $21 billion in federal subsidies to lenders in the | | | | private student loan, many lenders are currently |
| Federal Family Education Loan Program, rendering the | | | | accepting only minimum scores of 700 or higher. The |
| government-backed parent and student loans made | | | | average national credit score, according to Experian, is |
| through these third-party FFELP lenders essentially | | | | 694. |
| unprofitable. Compounding these lenders’ | | | | The stricter credit criteria and growing scarcity of |
| sudden loss of government subsidies are the general | | | | private student loan lenders are already having a |
| troubles in the student loan credit markets, part of the | | | | dramatic impact on the number of students who will |
| far-reaching aftershocks of the subprime mortgage | | | | be able to rely on private student loans to help them |
| meltdown. | | | | pay for college this semester — particularly |
| Many of the non-bank FFELP lenders secure the | | | | those low-income students who may need the most |
| capital they need to make new federal college loans | | | | financial assistance but are the least likely to qualify |
| by packaging and selling their student loan portfolios in | | | | under more stringent credit and income requirements. |
| the secondary market. But investors, still skittish after | | | | At community colleges and career-training schools, for |
| the collapse of the subprime and Alt-A credit markets | | | | example, where lower tuition costs are particularly |
| and wary of any kind of defaults in the face of | | | | attractive to low- and middle-income families, only 25 |
| spiraling foreclosure rates in the housing sector, have | | | | to 35 percent of the students have been approved for |
| stopped buying packaged student loans. Without | | | | private student loans this year, according to Harris |
| buyers for their federal student loan portfolios, FFELP | | | | Miller, president of the Career College Association, |
| lenders aren’t able to generate the liquidity | | | | compared to the 75 to 80 percent that qualified last |
| necessary to fund any new federal parent or student | | | | year. |