Read the paper lately? The current hubbub about sub-prime mortgages is hard to miss. But what you may not know is that this unrest is trickling down to the student loan industry, as well, reports Business Week. Along with recent legislation, the mortgage crisis is likely to affect both new and existing student loans.
The first to suffer are federal student loan programs. While the new legislation made about $11 billion additional federal aid available, it cut subsidies that helped lenders fund Stafford, PLUS and Grad PLUS loans. Without those subsidies and facing a shakier market, some lenders are abandoning funding federal loans altogether and others are taking extra precautions.
What this means for you:
If you have a low credit score (below 650), qualifying for a private loan will become much more difficult.
Students applying for federal loans will have fewer options because many lenders are no longer funding federal loans.
Even if you have good credit, you could still be turned down for a loan if your school’s default rates are too high.
Loan application is going to become a much more complicated process in the coming years.
The danger here, according to financial aid officers interviewed in the article, is that students unable to qualify for more traditional loan programs will turn to riskier private loan options. You’ve probably seen the TV ads promising you a quick loan no matter what your credit score – but these enticing deals come with some harsh repayment terms that will end up costing you more.
Want to learn more about these changes and what you can do? We will be featuring a webinar, Student loan update: understand the details behind the headlines, on February 5 at 1 p.m. CST. If you’re interested, contact Joe Pruden.
With regard to Federal loans, the interest rate is based on when the loans were disbursed and the federal regulations in place at that time. Fixed interest rate loans (like Stafford and PLUS disbursed on or after 07/01/06) will retain their current rate in the future. Variable rates, on loans disbursed before 07/01/06, are subject to change based on the rate of the Treasury Bill. The change takes place effective July 1st of every year.
Private loans interest rates vary by lender. Be sure to contact your lender to determine how the interest rate on your private loan is established and how frequently it may change. In summary, variable rate loans are the only type of loan that can benefit from a decline in economic markers like the T-bill.
The question borrowers want to know is whether, with the substantial decrease in the prime rate whether the interest on our loans will go down proportionately.
But, how will this affect those of us who already have loans?