What the bailout means for student loans
The $700 billion plan may give students easier access to loans.
Tuesday, October 7th, 2008
Many economists and Wall Street investors said the $700 billion economic recovery package was essential to preventing world markets from slipping into a long-term recession, but what does it mean for student loans?
The bailout should bring down interest rates on private student loans and increase their availability, said Mark Kantrowitz, president of MK Consulting, a national firm that provides student financial aid consulting services. He said the bailout will have no effect on Federal Stafford Loans or consolidation loans.
Kantrowitz said the $700 billion injection should free up credit for lenders so they can issue more private loans. The interest rates on these loans, which Kantrowitz said would have risen by at least 2 percent had Congress not passed the bailout, could start coming down as soon as November, he said.
The bailout won’t affect federal loans because they are guaranteed by the government.
Students will continue to have a difficult time consolidating their student-loan debt into one monthly payment. Many lenders have suspended their consolidation services, which Kantrowitz said were unprofitable for lenders. According to FinAid.org, 85.6 percent of the consolidation loan industry has left the market since the subprime mortgage meltdown first made headlines in August 2007.
“Consolidation loans won’t see any fixes anytime soon,” Kantrowitz said. “Lenders lose money every time they make them because they are still underwater.”
Consolidation loans
Although this is good news for students who need to borrow more than the government will lend them ($31,000 for financially dependent students; $57,500 for financially independent students for their entire college career), it doesn’t help students such as Curry Curtis, who borrowed from multiple sources and will have a difficult time finding lenders willing to consolidate her debts into one monthly payment.
Curtis, Olathe senior, said she borrowed $27,500 through the KU financial aid department, $8,000 through KU Endowment and a $2,300 federal loan through Wachovia, a private lender. Curtis said that she would have liked to consolidate all three loans into one, but that she understood she would probably end up having to pay back all three debts separately.
“I know it’ll be hard, but I still plan on trying to find a way to consolidate them when I get out,” Curtis said. “It’ll be really annoying paying them all back individually every month.”
Minimizing debt
Although students will likely find it easier to get approved for private loans, Kantrowitz said, students should exhaust all other financial options first.
Private loans come with higher interest rates than Federal Stafford Loans, and they are usually unsubsidized, which means debt starts accumulating while the student is still in college.
The interest rates on private loans are about 11 percent, according to FinAid.org. Kantrowitz said the bailout should bring them down to about 9 percent, which is still higher than the rates on federal loans.
Robert Baker, Lawrence credit counselor for the Housing and Credit Counseling Institute, said students should plan far in advance before borrowing money to finance their educations.
“As with all decisions requiring a large expenditure of resources, careful planning and a judicious gathering of information and options will save a potential college student money,” Baker said in an e-mail. “The choices a student makes in advance and the amount of time a student has to review options and make good choices could impact the overall cost of college or debt repayment for the next decade or so.”
Kantrowitz said a student’s top priority when deciding how to pay for college should be to minimize debt wherever possible.
— Edited by Lauren Keith
Discussion
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Many private loan interest rates are pegged to the LIBOR rather than the prime rate, so it is not certain that the bailout will help lower those rates.
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