The pinch of the credit squeeze on student loans is being felt as private lenders have begun to tighten their lending conditions.
Credit squeeze hits private student loans
As college expenditure keeps rising disproportionately compared to family incomes, many students are left with no other option but to take loans. It has been found that almost 75% of them leave their institutions with student loans. The amount of debt is normally much bigger for students who study in expensive private institutions. Students can, however, opt for the federal student loan program. All students can take the help of federal Stafford loans, which are not subsidized and offer a fixed rate of 6.8%. Subsidized Stafford loans, however, are available for students who can show economic need, and carry a rate of 6% for loans taken out after July 1. But the credit squeeze in the United States has now started taking its toll on student loans offered by private lending agencies.
Squeeze forces stricter lending terms
According to a survey conducted by the National Association of Independent Colleges and Universities, private lenders have already started sending signals to several institutions that they are soon going to impose stricter credit terms. There are already reports of some lenders increasing their interest rates because of the credit squeeze. Private student loans come with variable interest rates that are usually linked to the prime rate or another yardstick.
Private lenders are now also asking for co-signers before giving student loans. Students who cannot find co-signers having good credit will be either required to cough up much higher rates or forget the idea of getting loans altogether. Earlier, co-signers were not required to get student loans from private parties.
Legislation recently passed by the House makes it clear that private lenders must inform potential borrowers that federal student loans are also available to them. It also requires these lenders to provide better information about their loan terms. Students are often forced to seek loans from private lenders when they reach the limit of their federal student loans.
In order to improve the situation, an increasing number of educational institutions have now started eliminating loans from their aid packages. Some are offering grants instead of loans, saving a handsome amount of money for the average graduate. But a student may still need loans, albeit a smaller amount, to cover his/her family’s likely contribution.
So, as the credit squeeze makes private student loans costlier and harder to get, students are likely to think carefully before seeking admission to an expensive institution. And in the worst-case scenario, they may have to even suspend their studies.