Add students who borrow from private lenders to the ranks of Americans — homeowners and businesspeople, among others — who are struggling with banks’ unwillingness to lend in this risky economic climate.
Although this won’t affect the vast majority of students most of whom use federal loans. Instead it affects the 8 percent of students nationally who rely on private loans, who face high interest rates and increasing difficulty in approval.
Since the U.S. economy began to stagnate, banks have tried to limit their risk of losing more money by increasing the conditions on which they award loans.
The result is they give fewer loans, Andrew Winton, the Minnesota chair of banking and finance at the Carlson School of Management, said.
“There’s always a risk that student loans will default,” Winton said. “If the economy is in worse shape that makes the risk even higher because students will find it harder to get jobs when they graduate and they find it harder to pay back their loans.”
Since the crisis began, around three dozen financial institutions have stopped giving out private student loans, according to FinAid, an online financial aid resource.
One company, Sallie Mae, represented around 42 percent of the private loan market last year. Although, the lender continues to make private loans, Sallie Mae corporate communications representative Erica Eriksdotter said.
“We have significantly tightened our credit underwriting criteria under which we provide private loans,” she said.
Eriksdotter suggests that students having trouble obtaining a private loan apply with a “creditworthy co-signer,” as about 70 percent of private student borrowers with Sallie Mae do.
Private loans accounted for about 5 percent of financial aid money disbursed at the University of Minnesota in 2008, according to data from the Office of Student Finance .
The 2008 amount distributed by the University in student loans showed a decrease of $7 million from two years before, although overall borrowing has increased.
New federal loan limits and the 2006 creation of a parent loan for graduate students could partially explain that decrease in private loans at the University of Minnesota, Kris Wright, director of the Office of Student Finance, said.
“Before ‘grad plus,’ a number of the graduate programs were so expensive there was no additional state or federal money for them, they had to borrow in the private market,” she said. “That’s no longer with the ‘grad plus’ loan because they can borrow up to their own cost of attendance.”
In addition to being difficult to get, private loans tend to have an interest rate that is two or three times as much as federal loans, which are fixed-rate. They also aren’t guided by federal rules like forbearance — which would delay when a borrower has to pay back the loan — that protect borrowers, Wright said.
“Those are generally not the best loans for students to take,” she said. “Students should always take the federal loans first if they’re going to need to borrow.”
Most students using private loans don’t meet the criteria for federal loans because of a failure to satisfy academic requirements or because they’ve already borrowed as much as they can under the program, Wright said.
Funding sources for both federal and SELF loans, by far the most common loans for students, are secure, Wright said.
She recommends that students having trouble paying their loans contact the direct loan processing center or their lender.
“There are economic deferments and things like that where you can avoid paying for a time,” Wright said, although that doesn’t apply for private loans.
The rate at which private student loans issued nationally will default is still unknown, although they amounted to $17.6 billion in 2008.
Even students with federal loans seem worried.
“There does seem to be somewhat of an increase in students coming in and asking what their options are,” Wright said. “I think people are spooked.”