Student loans to be impacted by subprime lending crisis

Lenders that process federal Stafford loans and PLUS loans as well as private loan companies are expected to require students borrowing for the first time this spring semester to have higher credit scores, and may impose other changes to their policies, CNNMoney.com reports. Borrowers should anticipate higher interest rates as the student loan industry tries to cope with the credit crisis and the effects of the College Cost Reduction and Access Act of 2007, which cut payments to lenders and guarantee agencies.

Mark Kantrowitz, publisher of FinAid.org, an online provider of student aid information, predicts that many companies will no longer issue loans to students with credit scores below 650. In addition, loan companies will require more applicants to have co-signers. "I do expect it to be a little more difficult to get one of these private loans," Kantrowitz says, yahoonews.com reports.

Sallie Mae, the nation's largest student loan lender, said in a Securities and Exchange Commission filing last week that it would no longer offer loans to students with higher credit risks -- the subprime borrowers. Sallie Mae has seen higher than expected default rates, according to the Chicago Tribune. The company has also withdrawn from a recourse loan program in which it had shared risk with for-profit education companies for loans to students with poor credit.

Changes in federal policy will affect Stafford and PLUS borrowers, according to FinAid.org. Students should expect lenders to cut loan discounts and increase the minimum balance requirements for loan consolidation. FinAid expects that federal policy will discourage loan consolidation and minimum balances for loan consolidation will be $10,000. FinAid also expects that loan discounts like origination fee waivers and consolidation discounts will be cut, CNNMoney reports.

Among students looking for private loans, international students, who are not eligible for the federal loans, are having the most difficulty, says Rockne Bergman, manager of professional programs at the University of Minnesota's financial aid office.

"These lenders are just being very careful as to whom they are lending to. And they want to make sure they will be able to get those loans paid back," Bergman says, according to yahoonews.com.

Financial aid professionals are concerned about the potential increased costs for students in the current student loan market. "I haven't seen it this bad before," Pat Watkins, financial aid director at Eckerd College in St. Petersburg, College, who has worked in the financial aid industry for 34 years told yahoonews.com. She expects that students with existing loans will likely incur more costs and a second loan to be repaid.

Watkins has been told by loan companies NextStudent in Phoenix and Goal Financial in San Diego that they will not fund new Stafford or PLUS loans. And she worries that some students with poor credit could end up paying very high interest on private loans. "We haven't seen the full impact of this, but it is coming," she says.

But Robert Shireman, executive Director of the Project on Student Debt thinks that student borrowers, even those with bad credit, will benefit in the long run from the current turmoil. "I think on the balance it's a good thing," he told the Chicago Tribune. "It will drive colleges and students to look for better ways to finance college education that don't involve so much expense and risks for the students."

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