Parents Be Prepared – The Student Loan Crisis Is Coming!

As if the sub-prime mortgage crisis is not wreaking enough havoc on the American consumer, now comes the next distressing event, a student loan crisis. And it may be happening as early as this fall.There will be fewer lenders willing to loan money, higher loan costs and much more competition due to tougher lender standards.How Did This Happen?Several events happened at the same time to cause this crisis, which will affect our childrens ability to go to college.1) Higher college costs have led to larger student loans resulting in a sizeable increase in loan defaults.2) In the last ten years, private student loans have skyrocketed dramatically. This affected lenders because private loans are not guaranteed by the federal government. This means, if a student defaults, the lender will have to write off that loan. This differs from federal loans because they are subsidized and guaranteed by the federal government up to 98 cents on the dollar. For instance, Sallie Mae wrote off $1.6 billion in the 4th quarter of 2007 because of losses from private student loans.3) Investors are no longer interested in buying asset backed securities (bundles of loans). Many lenders rely on this money from the investment markets. Without funding, lenders cannot loan. In fact, many have stopped making student loans all together and are now focused on the private loan market. This has a dramatic effect on students because federal loans are fixed at 6.8% while private loans can climb as high as 19%.4) The sub-prime credit crunch has increased the cost of securing money for lenders. Some lenders rely on borrowing money instead of relying on investment markets. However, obtaining this money has become more costly and the increase in costs (interest and fees) will get to you, the borrower.5) Lenders are becoming much more selective to whom they loan money. They are concentrating on only making student loans to colleges with high graduation rates. The theory here is that if a student does not graduate or get a degree, they chances of repaying that loan are much less likely.How Will This Affect My Child Who Wants To Go To CollegeWith fewer lenders and less student loans available, your child will have fewer options to secure a loan. And this applies to new college students as well as existing college students. Do not be surprised if you are a current college attendee and your existing lender no longer offers student loans.As previously discussed, most lenders are now concentrating on loaning money through the private loan market. This means higher interest rates, which can escalate up to 19% as opposed to 6.8% on federal loans, and higher up-front fees.
Additionally, credit scores will now be relied upon much more for student loans. This is a change because federal student loan programs did not require credit information, but private loan programs will. And the lower your credit score, the higher your up-front fees will be some as high as 10% of the loan.As A Parent, What Do I Do?1) Either you, the parent (if you are paying for college) or your child should immediately start exploring different lenders NOW. Even with this looming crisis, you should still look into securing a federal loan before relying on a private loan. (Remember, the interest rates and fees can be much higher for a private loan.)2) Explore grants and financial aid. Call your colleges financial aid office as get as much information as possible. Also ask them about preferred lenders they work with.3) If your child is going to an elite college such as an Ivy League school, investigate their loan-free financial aid packages.4) If the child is borrowing the money, consider co-signing or getting a co-signer with a great score. This will reduce the fees and interest rate charged dramatically.5) Teach your child how to be an entrepreneur, which is the quickest way to riches. It gives your child options such as:A) Making money in case they can not afford college immediately.B) Making extra money to help pay for college especially if a private loan is the only source of money available, resulting in higher interest rates and higher up-front fees; andC) Standing out among other applicants vying for a set number of grants or financial aid packages. College admission directors want applicants who offer something unique and different. When a child illustrates how they ran their own company as a teen, it gives them a tremendous advantage over their peers.