Student loans looking less reliable due to economic crisis

With the tumultuous events in the economy in the past few weeks and months, many students have begun to question how it will affect them over the next few years. If we are indeed headed into the next Great Depression, or even if we are not, what does this mean for students who rely heavily on student loans to get them through school?

The source of the problem began in the housing market; however, students will most certainly feel the reverberating effects as banks become much more cautious about lending.

Nick Perry, a reporter for the Seattle Times, wrote an article in which he stated, “The nation’s largest student-loan lender, Sallie Mae, is still writing private loans but has become ‘very selective’ … That means lending only to students who have clean credit histories, and almost always requiring a co-signer such as a parent.”

Overall, Perry said that “36 lenders have suspended writing private student loans over the past year.” How will this affect students in the course of the next year or so? With lenders being more selective about who they lend to, and the number of lenders decreasing significantly, it will be much more difficult to secure a loan.

John Stapleford, senior economist at Moody’s Economy.com and once a professor at Eastern University, says however that private loans are only 10% of the loans out there. At this point in time, it would be better to pursue a federal loan if you are looking for a way to fund your education. According to Stapleford, in terms of federal student loan interest rate, “If you were to lock in your student loan right now it would be 3 percent, very good, below the inflation rate.”

This is not true for all loans, especially private loans. Perry said, “More and more of those loans are directly marketed to students, without any oversight or involvement from schools and often at higher interest rates.” In looking at the interest rate for private loans, Stapleford makes the point that “they will not lock in the rate and will have a variable interest rate. You’re on a roller coaster, [they] can hike the rate at any point.” Since the banks are so reluctant to lend money, it is not the best time to look into private lenders. “It’s a higher risk to get private money,” Stapleford said.

With consumer spending going down, Stapleford believes that it will lead to better deals on computers and used cars for students, because prices will become much more competitive. And what does this mean for students who are planning on graduating this year or in the near future? According to Stapleford, “For students, the first thing is, it’s going to be harder to get a job … but it won’t be impossible.”

He suggests for those who graduate, to pay off private loans first, and then to focus on the federal loans. However he does say, “If you borrow money from the federal government, don’t be cavalier about it,” because the government has really begun to crack down on students who are defaulting on their loans.

Stapleford emphasizes the importance of having a college degree. He notes that the manufacturing sector has had a boost in recent years because of a weak dollar, but the dollar now is getting strong which means a boost in the service sector. He said that “the service economy will continue to dominate,” and in that service economy, “education is king; people should feel confident in having a college degree.”

Some information taken from Nick Perry’s article, “Students feeling economy’s crunch.”