The State of Student Lending

The financial aid process in itself is very confusing for students and parents, without adding the myriad of changes that have occurred in the student lending community in recent years. You and your family may have encountered some changes to the process of applying for financial aid, or selecting a student loan lender. Provided below is a brief summary of some of the broader changes that have occurred or are being contemplated that may have an impact on the availability of student loans to help families pay for college:

1. Government Legislation

   There is currently proposed legislation that would end choice of higher education loan providers by eliminating the bank-based FFELP (Federal Family Education Loan Program) and re-direct the purported savings to a wide array of purposes. Should this occur, students and parents would no longer be able to select private institutions, like banks and other lenders, for their federal student loan needs; instead, all federal student loans will be provided directly by the government, through the Direct Loan program. Some schools already use the Direct Loan Program, so not everyone will experience a change.

2. Financial Aid Office Changes

   As a result of legislative uncertainty, some schools are already in the midst of switching to the Direct Loan Program. If your financial aid office has chosen to use the Direct Loan Program, you will now obtain your federal student loans directly from the government, instead of selecting a private lender. If you have questions about your options for selecting a lender for your federal loans, make sure you speak to your financial aid office.

   Many schools have also been affected by the economic and stock market downturn and as a result may have smaller endowment funds available. Fundraising contributions from alumni and corporate sponsors have also become more difficult to secure, and often at lower amounts than in previous years, generally due to the impact of unemployment or the recession. With less money to spend, some schools may have had to tighten spending or reduce financial aid awards.

3. Impact of the Credit Crisis

   The nation’s credit crisis has had a significant impact on the student loan industry. On the federal lending side, the credit crunch combined with Congressional cuts in lender subsidies in 2007 to reduce the profitability of federal student loans for private lenders. As a result, a significant number of banks exited the FFELP Program. Lenders that remained also faced liquidity issues and the government stepped in with temporary legislation to provide lenders with liquidity to continue to fund new loans through June 30, 2010.

   On the private loan side, to lower their exposure to credit quality risks, private loan lenders tightened credit standards for borrowers. Some lenders ceased making private education loans altogether as liquidity issues continue to exist for these loans. While it is anticipated that this situation will improve over time, there are still very few lending options for borrowers in need of a private loan. Only a handful of lenders are currently making private loans to students, and their underwriting criteria is tight and expected to remain so for the foreseeable future.

   Many students are still unable to secure private loan funding for school on their own. Since the majority of private loans for undergraduates require a credit-worthy cosigner, students are dependent on their family members or friends to help them get approved. Families impacted by job loss, decreased income and average credit scores will have a difficult time assisting in securing private loan funding. If you are experiencing difficulty with getting approved for a student loan, make sure you speak with your financial aid office about your situation. If your family’s financial situation has changed since your financial aid was last evaluated, it’s possible that once your school updates your information, you may qualify for some additional financial aid.

Although the economy is slowly showing some positive trends, the financial aid and student lending industries are still undergoing a very slow recovery. But we remain hopeful that 2010 will start to show some sustained economic recovery and provide some good news for college students and parents.