Overcoming the Student Loan Crunch: How Providing More Financial Aid and Financial Aid Counseling Will Help

By Chitty, Haley | University Business, March 2008 | Go to article overview
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Overcoming the Student Loan Crunch: How Providing More Financial Aid and Financial Aid Counseling Will Help


Chitty, Haley, University Business


THE RECENT ANNOUNCEMENTS made by many student loan companies that they would be tightening lending practices and increasing loan rates and fees highlights the importance of student financial aid counseling and the need for more need-based student aid funding.

In January, some of the nation's largest student loan companies announced that they would tighten their lending policies and discontinue lending to students with a higher risk for default. Lenders say these changes are due to recent congressional action that cut Federal Family Education Loan Program (FFELP) subsidies, compounded by continuing disruptions in the credit markets sparked by troubles in the mortgage lending industry.

"Eight months ago, as long as the applicant was breathing, [lenders] approved everything," Harris Miller, president of the Career College Association, told BusinessWeek. "Now, everyone is looking at every loan and every piece of paper with a flyspeck."

Career colleges and the students at these institutions are expected to be the most affected by changing lender policies because they serve a larger number of low-income students who are more likely to have poor credit scores, less likely to graduate, and more likely to default. "Access to private lending sources is absolutely critical for many working adults to be able to bridge the gap between federal grant and loan program limits and actual tuition costs," said Miller in a press release. "Many lenders have stopped subprime private lending and may stop private lending altogether. Their retreat may leave many students unable to finance the balance of their educations."

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Unfortunately, access to private loans has become critical for many students, because funding for need-based financial aid programs has not kept up with higher education costs. Increasing investments in financial aid would help alleviate this precarious reliance on private education loans.

NEW LENDING STANDARDS' AFTERMATH

There is considerable disagreement about the effect of stricter lending standards. Some argue that this is good for students because it prevents them from taking out private loans that generally have less favorable terms than federal loans and can cause significant burdens on borrowers.

Kalman A. Chany, author of Paying for College without Going Broke (The Princeton Review), first published in 1992, argues that too many students and families take out private loans before taking full advantage of federal loan programs, which are available to students with no credit history, provide more favorable repayment options, and are generally cheaper. Some believe that the stricter lending standards will force more families to borrow through federal loan programs before borrowing from private institutions.

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