Tough Times Series: Getting Student Loans During the Credit Crunch

by Judy Dahl

In these post-mortgage-meltdown days, when a new financial crisis seems to loom daily, is it still possible for young people to get the loans they need for college? When it comes to federal loans, recent legislation has helped keep funds available. If you need private loans as well, those are harder—and more expensive—to get than in the past. Fortunately, more credit unions are stepping up with affordable options.

When you're seeking financial assistance, your first step should be to contact your college's financial aid office. "They'll help ensure you get as much free money—grants and scholarships—as possible before you borrow," says Justin Draeger, vice president of planning for the National Association of Student Financial Aid Administrators (NASFAA) in Washington, D.C. "And then they'll ensure you get as much in federal loans as possible." You can, and should, also search for grants and scholarships from other sources.

Only after exhausting those possibilities should you seek private loans. Federal loans have annual and lifetime caps, so they may not cover the entire cost of your education. Private loans can fill the gap.

"We really stress the importance of exhausting your federal sources before turning to private loans," says Mike Weber, vice president of marketing for Washington D.C.-based Credit Union Student Choice. "Federal loans are the cheapest, and in some cases the government subsidizes the loans [pays the interest while you're in school]."

You also can defer payment of federal loans while you're in school, and even after graduation under some circumstances, such as a job loss. You can use extended payment plans, too, if necessary.

Federal loans still available

Federal loans are still there for students, Draeger indicates. "We don't want them to think the door is closed. There was some turbulence in the market in the beginning of 2008, and some lenders stopped offering them.

"Then in May of 2008 the federal government passed the Ensuring Continued Access to Student Loans Act (ECASLA) to ensure funds are available for all students," he explains. "To date, no student has been denied a federal loan."

Lower-income students can get Perkins loans, and any student can get Stafford loans, regardless of their credit records or lack thereof. Parents of undergraduates can borrow through the federal PLUS loan program.

PLUS loans require a credit check, and lenders have tightened their credit criteria. As a result, parents with recession-damaged credit records may have more trouble getting these loans. "They're still easier to get than private loans, though, because ECASLA includes provisions for parents who have fallen delinquent because of medical bills or certain other circumstances. And if a parent is denied a PLUS loan, the student can get additional Stafford money," Draeger notes.

Private loans harder to get

More students also have needed private loans as college costs have risen dramatically over the last decade—faster than federal loan programs could cover them. "Generally, banks and specialty finance companies made the loans and sold them on the secondary market, like mortgages," says Weber.

"This [type of] loan sale provided funds to make more loans," he continues. "After the mortgage meltdown, the secondary market for these loans dried up, too, and lenders lost a key source of funding. Banks and finance companies had based their student-loan business model on making and selling loans, and many were forced to drop out of the market."

Faced with ongoing market turmoil, those lenders that remain are charging higher loan rates and fees. And their credit criteria are far more stringent, so students typically don't qualify without a co-signer who has an excellent credit record.

"If you need a private loan, your best option is to go back to your school and find out which lenders are still offering the loans to students," advises Draeger. "Or go to a local credit union you might already have a relationship with."

Many credit unions offer alternatives

Credit unions are stepping in to fill the vacuum left as banks and finance companies exit the student loan market. "They're doing it the credit union way, offering borrower-friendly rates and terms while employing responsible underwriting and risk management," Weber says. "It's an opportunity to connect with young adults and do something good for the next generation."

Credit unions have an advantage because they're not looking to sell their loans on the secondary market. "They're much less subject to the whims of Wall Street, so they can deliver true value to borrowers," says Weber.

When you're seeking financial aid, he recommends, be a savvy consumer and understand your options. "We always stress maximizing free and low-cost sources, and only turning to private loans to fill gaps. If private is your best option, do your homework and make sure you find the most favorable terms. Be very diligent."

Like Draeger, Weber recommends starting with your school financial aid office. You can also consult loan-rate comparison Web sites like SimpleTuition.com. Be sure to read the fine print—some lenders say they offer extremely low interest rates. "But that's only for people with perfect credit records. It can be confusing," adds Weber.

Credit unions typically offer a better deal. "Fees of 2%, 6%, even 8% are very common in student lending," notes Weber. "It goes back to what credit unions are all about: Delivering an economically valuable product to members."

Plan ahead

If you're heading off to college—or back to college—it's never too soon to plan how you'll pay for it, especially in today's economy. To apply for federal aid, complete the Free Application for Federal Student Aid (FAFSA). After you submit the FAFSA, your college will tell you what school financial aid and federal financial aid is available.

If there's a gap, look for private loans. "And if you're having trouble finding a private loan, look at whether your school is the right one for you," Draeger suggests. "You could attend a community college, and likely be able to get enough federal aid to pay for it."

Published March 24, 2009

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