THE CARROLL NEWS: Can't pay for college: As the economy takes a turn for the worse, parents and students are finding it harder to pay for school

Can't pay for college: As the economy takes a turn for the worse, parents
and students are finding it harder to pay for school
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Bridget Lynch on 17 April, 2008 01:00:00
 
With student loan companies in disorder and banks tightening their standards and
raising rates on other types of borrowing, parents and students will have to
navigate an unfamiliar and difficult terrain when it comes time to pay for
college this year.
Families often use a combination of resources to pay for college, drawing on
savings, federal loans, bank loans and home loans to plug the gap between
college costs and financial aid, according to The New York Times.
Other sources of financing will become less accessible as consumers find
themselves stretched thin and lenders get particular, even if the government
wards off problems in the credit markets and federal student loans are easily
accessible.
According to a recent New York Times/CBS News poll, 70 percent of parents
surveyed were “very concerned” about how they would pay for college;
only 6 percent were not concerned.
An emergency safety system has been put into place to ensure continued
availability of federal loans. The secretary of the Federal Education Department
met on Friday with representatives of  state agencies and non-profit companies
that guarantee federal loans on behalf of the government. The goal was to work
out how the guarantors would serve as lenders, if necessary.
Last year, students and their parents borrowed nearly $60 billion in federally
guaranteed loans, a figure that has grown more than 6 percent annually over the
last five years, after taking into account inflation. In recent years, the
growth rate has declined but may pick up as the economy slows and as other
borrowing options fade.
Lawmakers in Washington have proposed increasing the amounts that students can
borrow through federal programs and authorizing the Education Department to
purchase federal loans, thereby providing banks with cash to supply more loans.
The House Education Committee recently approved legislation that would allow
dependent students to borrow a total of $31,000 through federal programs to pay
for their undergraduate education, up from $23,000, the current maximum.
Still, it is difficult to gauge whether a financing problem will emerge later
this year for students and, if so, how serious it might be. The disruption in
the federal lending program so far has mostly been from borrowers shifting to
another lender.
Some student advocates say lenders are exaggerating the obstacles they face in
search of a bailout from Washington.
“Student lenders are trying to hype the current credit crunch to scare
Congress into providing them additional subsidies and to discredit last
years’ hard won higher education reform,” said Luke Swarthout of the
U.S. Public Interest Research Group in Washington, referring to cuts lawmakers
made last year to the subsidy payments to lenders of federal loans.
Kevin Bruns, executive director of America’s Student Loan Providers,
dismissed such criticism as baseless in a New York Times article.
“Lenders’ only goal is to get the administration to use its
existing authority to provide liquidity to the capital markets that fund federal
student loans. Lenders don’t need to overstate anything — the facts
speak for themselves,” he said.
It remains difficult for lenders to sell securities backed by student loans, in
turn making it harder to raise capital. One guarantor of private loans, a
non-profit company called the Education Resources Institute, filed for
bankruptcy protection this week.
The House legislation seeks to address this situation by allowing the Education
Department to buy student loans itself. According to the Education Department,
at least 25 loan companies have stopped granting federal loans. Some estimates
put the number at nearly twice that.
Colleges generally say that more than 2,000 companies grant student loans, and
there are plenty of lenders to step into the opening roles.
Some commercial education companies have already taken steps to ensure that
their students can find lenders, in some instances by preparing to make loans
themselves.
Problems are more likely for those seeking private loans, which do not have any
government backing. Like other consumer loans, the terms of private loans vary
depending on the credit histories of individual applicants and in some cases can
be above 20 percent interest.
Private loans have grown sharply in popularity over the last 10 years, as
families have looked for ways to pay the tuition difference. According to the
College Board, students took out more than $17 billion in private loans last
year, up from just $1.6 billion a decade earlier.
Families also have bridged the gap between college costs by borrowing against
their homes, but is another disappearing option as house prices fall. Millions
of homeowners now owe more than their houses are worth, leaving no equity to
borrow against.
There is no data on how many parents may have used home equity loans to pay for
higher education, but there is no doubt many did to take advantage of tax breaks
and lower rates.