As if rising tuition bills weren’t bad enough, the cost of taking out a private loan to pay for college is likely to begin climbing, experts say, as fallout from the nationwide credit mess extends its reach into higher education.While the growing scrutiny over mortgages and, to a lesser extent, auto loans has been garnering most of the attention pertaining to credit woes, the ongoing lending turmoil also is impacting private student loans, said John Pearson, a certified financial planner at Shelton-based Barnum Financial Group who specializes in education.

“All these loans are probably going to be a lot harder to get,” he said, something students and parents will start to notice around May or June as they begin to plan how they will pay for college.

“I doubt that many people have thought about this,” Pearson said of credit industry problems’ impact on education loans. “I don’t think there’s a lot of awareness of how this flows over to the student loan side of this at all.”



Snowballing problems in the mortgage industry, spurred by defaults on home loans, have led to stricter lending standards across the board. Lenders, already taking a hit in the current market, want to protect themselves against future losses by ensuring that the borrowers they lend to will not default, Pearson said.

“(Lenders) are going to be looking at these things a whole lot more carefully,” he said.

As a result, families applying for student loans this spring and summer likely will see higher interest rates and up-front fees, he said. Also, the number of discounts lenders offer borrowers — such as those for making on-time payments, for example — will decrease, Pearson said.

In addition, borrowers with poor credit will find it harder, if not impossible, to qualify this year for loans they may have been eligible for in years past, said Dominic Yoia, Quinnipiac University’s senior director of financial aid.

“Credit criteria has tightened,” he said. “The students and the parents are going to be paying slightly higher rates and fees on loans.”

One component driving the trend, Yoia said, is that student loans have become much less attractive to investors in the current economic climate. Typically, lenders process student loans and then sell them, usually in large bundles, to investors. These days, however, investors are not interested in taking a gamble on student loans, Yoia said.

All this comes at a time when families have become increasingly dependent on private loans to cover the growing price tag of a college education, he said. “As college costs continue to rise, families depend more and more on private loans to subsidize their college education,” he said.

Federal loans, which have government-imposed limits, have not kept pace with the climbing cost of tuition and other school-related expenses, making private loans a necessity for many students, said Martha Holler, a spokeswoman for Sallie Mae, which claims to be the country’s biggest student loan provider.

The Virginia-based company’s portfolio, which includes federal as well as private loans, totals $164 billion, Holler said. Interest rates on the company’s private loans currently range from 5 percent to 12.5 percent, depending on the borrower’s credit standing. The median interest rate in Sallie Mae’s portfolio is 8 percent, Holler said.

Sallie Mae continually assesses its lending rates, criteria and practices and at this point does not foresee having to make major adjustments in light of current market conditions, she said. But others in the industry may be feeling the pinch, she said.

“Certainly, we’re seeing some student loan providers re-evaluate whether they’re going to be able to continue making loans,” she said. How widespread that trend will become and how many lenders may leave the marketplace, she said, “is the million dollar question.”

Author: Cara Baruzzi

Site: NHRegister.com

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