Securing Student Loans in a Tighter Credit Market

The credit crunch is arriving on college campuses this summer and many families who qualified for student loans last year could find themselves without loans this year if they wait until August to apply.

In April, Sallie Mae, the nation's largest writer of student loans, warned that demand for student loans will "significantly exceed lender supply" for the 2008-2009 school year. And Bank of America, the third largest lender in the country, recently announced it will not make any private student loans this year. Similar statements and moves by other student loan companies, small and large, mean that 2008 will be a particularly challenging year for students and families to secure the financing they need to cover the cost of college.  

"For students and families who need to borrow, one thing is clear," says Kevin Walker, chief executive officer of student loan comparison site SimpleTuition.com. "Borrowers need to start early this summer and allow extra time to secure student and parent loans.  Money is still available, but the landscape is very different this year."

Factors driving the campus credit crunch include:

* Several student lenders, including big ones, are exiting the industry this summer. Reduced federal subsidies for commercial lenders who distribute federal loans will mean less incentive for the lenders to stay in the marketplace.

* At least 4 state-affiliated student loan authorities, including Michigan and Massachusetts, have already announced they will not make any federal student loans this year. It's likely more states will follow suit before the end of the summer. Across the country, thousands of students rely on these non-profit state run authorities to provide federal student loans, usually at better terms than for-profit lenders.

* Fewer funds will be available for private student loans. In fact, SimpleTuition.com predicts that available private student loan funds will be as much as $8 billion less than last year.

* Just like mortgage companies, lenders still funding private student loans have tightened their standards. Last year, applicants with scores in the 630 to 690 range could generally qualify for student loans. This year, a few lenders are requiring scores of 700 or higher, leaving a large percentage of the borrowing population in limbo, Walker points out. As of June 2008, the national average credit score is 693, according to Experian.

"Parents should not assume they will qualify for a private student loan this year just because they qualified in the past," he says. "One bit of good news is that federal student loans are available in increased amounts this year.  Federal loan availability, while possibly subject to some 'churn' of providers, will be maintained.  Borrowers should not tap private student loans until they have fully accessed federal student loans."

SimpleTuition.com is the leading Web site for personalized federal and private student loan research and comparison shopping. Ranked on Kiplinger's Best List as the top financial services Web site for student loans, SimpleTuition.com helps students and parents make sense of education financing options, providing comparison information on multiple Stafford, private, PLUS and GradPLUS loans from dozens of lenders.

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