Credit crisis hits student borrowers

The nation’s tightening credit market has forced top private student loan providers to alter their lending practices, prompting concern in GW’s office of financial aid about students’ access to manageable loans.

The University’s top financial aid administrator said he was worried last week over new standards at the nation’s largest student loan providers that could make it more difficult for undergraduate students to borrow for college from private lenders. The changes include higher interest rates and more burdensome terms for student borrowers with low-income or poor credit ratings, as well as requirements that students begin paying off the debt while still in college.

Dan Small, executive director of financial aid, said that requirements to attain the lowest interest rates on student loans are changing and borrowers with low credit ratings could be forced to pay an additional 9 percent on top of the regular rate. While more GW students are turning to federally guaranteed loans, a significant portion – about 35 percent – still take out private loans to help pay GW’s high tuition, well above the nationwide average of 19 percent.

Funding for the low-interest and federally guaranteed Stafford and PLUS loan programs is limited. With the cost of higher education rising rapidly in recent years, more and more students have turned to private lenders to make up for the shortfall. But with the economy the recession, private lenders are becoming more selective and adapting terms that effectively cut off necessary credit lines for some students.

Small said he was also concerned about new policies from Sallie Mae, the nation’s largest student loan provider, that are aimed at encouraging students to pay back their loans quickly. The company recently cut the typical borrowing term from 15 to 25 years to 15 years or less and announced they would require borrowers to begin making interest payments while they are still in college.

“Sallie Mae did this to make sure students understand this is a loan that needs to be paid off,” Small said. “That’s their thought process, and on paper that sounds very logical, but I don’t know if that is going to serve our students well.”

Students who cannot pay the monthly fees on top of tuition and attendance costs will be ineligible for the loans.

Small said other private lenders might also follow suit, forcing students to begin paying off their loans while they are still in school.

“We have meetings with representatives from other lenders and they are saying they will offer the new plan and keep the longer-term plan as well,” Small said. “But no one can really say for sure what they will do because the economic conditions keep changing.”

Sallie Mae’s chief lending officer, Jack Hewes, said last Wednesday at a conference that “Sallie Mae, and the industry in general, has put [students] in an untenable position” by letting them keep their debt for years and seeing it double or triple from deferred interest.

And while the changes may make it more difficult to secure loans from private lenders, some say it may be for the best because it drives people toward lower-interest, government-backed loans.

“Because of the whole situation in the economy, I think people are going to think really hard about private loans,” said Sandy Baum, an economics professor at Skidmore College and senior policy analyst for the College Board in New York.

The new terms will only apply to new private loans, and Hewes and Small both said they expected more students to rely on government loans and grants as a result.

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