Students Loans Hurt By The Subprime Mortgage Mess

It’s now clear that the credit problems hurting real estate are only the tip of a much bigger iceberg. Just about all credit markets, including auto loans and credit cards, are now melting down because lenders and borrowers have been careless about running up too much debt. The latest victim is the market for education loans, and it means that college students will probably have a harder time borrowing money in 2008 than they have for many years.

Student loans come from a mix of government and private sources. Unfortunately, just about all the various lenders in this market are getting cold feet about lending money to kids in college, their families, or even to each other.

Stafford and PLUS Loans
The situation with Stafford and PLUS loans shows how credit problems can run more than one level deep. Private loan companies give out both these low-interest loans. But the federal government has always guaranteed the loans – protecting the loan companies from risk. Unfortunately, the government is now nervous about bad credit. Congress has recently voted to cut back on the financial support they’re giving to these loan companies. The effect has been immediate: private lenders and even state-backed student loan organizations in Michigan, Iowa and other states have either cut back severely on the number or loans they give out or stop giving loans altogether.

Sallie Mae, the largest supplier of student loans in the country, has also tightened up it’s lending standards, and started to refuse to give money to students who attend schools that either have low graduation rates, or who’s graduates tend to default on their loans at a higher than normal rate.

The Private Money
Of course, Stafford loans only provide up to $5,000 per year, forcing students to look to private lenders to help them pay the rest of their tuition costs. While these private banks and loan companies haven’t disappeared, many are now insisting that students have a FICO credit score of at above 650 before in order to get a loan. Others are insisting that students have their loans co-signed by parents. If parents have their own credit problems, however, this can be a big obstacle. Quoted in the Des Moines Register, the president of the Iowa Association of Independent Colleges and Universities Gary Steinke described the student loan predicament in his state as “a very serious, tricky situation.”

Loans For Online Degrees
For online college students, some analysts see the glass as half-full, while other see the opposite. Elearning schools that teach basic career skills in everything from culinary arts to real estate tend to attract less-wealthy students than private colleges do. Those less affluent students may find it harder than ever before to borrow for school. On the other hand, distance learning schools generally charge so much less in tuition than traditional school that most students simply don’t have to borrow that much to pay for tuition from them. Phoenix University, for example, is quoted in The New York Times as saying that less than 5% of it’s students need private loans to help pay for school.

In some states, private banks are stepping up to the plate to lend money to students out of a sense of commitment to their communities. Students should keep in mind that they may have to look a bit harder to find student loans than they would have just two years ago, keeping in mind that there are still lots of inexpensive schools and sources of money out there.