How the Credit Crunch Affects Student Loans
Across the United States, media sources of all kinds have been covering the downturn of the housing market and the country's continuing slide toward a recession. Perhaps the most troubling aspect of the current credit crunch is how thoroughly it's spread through the economy.
Unfortunately for those receiving acceptance letters to colleges and universities, the latest area affected by tightening credit seems to be student loans.
Click Here For a Free Bankruptcy Evaluation
Factors Leading to Student Loan Shortage
In some ways, the housing market's collapse acted as the first domino in an elaborate maze of dominoes standing on end: now, they're all collapsing. Here's a look at the steps leading up to the shortage of student loans.
- The federal government recently cut back on the subsidies given to those who offered student loans, meaning that student loans are less profitable for lenders than before.
- Tightened credit standards have led to increased borrowing costs and less available credit for lenders.
- A shaky credit market means that fewer investors are interested in purchasing student loans on the secondary market, which means lenders have more trouble turning a profit from student loans.
- Decreased investor demand for student loans means lenders can't sell as many student loans as before, and so pull out of the market (including federally-backed programs).
- Fewer federally-backed loans are offered, meaning that fewer students can access such loans.
- Some students are turning to private loans and other sources, which tend to have higher interest rates and can be more difficult to repay.
Click Here For a Free Bankruptcy Evaluation
The Bad News
Many economists and education experts have noted that this chain of events is cause for concern. Limited access to federally-backed loans could mean that some American students don't have a chance to pursue higher education, even if they've been accepted to college already. And, if students are forced to take out expensive private loans to pay for school, they could end up in more debt than they can handle.
Since the change to bankruptcy law took effect in 2005, bankruptcy petitioners have been unable to discharge student loan debt. And starting out on your own can be challenging enough without adding epic amounts of debt to the picture.
The Good News
Luckily, there's still hope.
The Department of Education has estimated that seven million students will need about $68 billion in student loans this year. Considering that lenders comprising about 14% of the student loan market have reportedly stopped offering government-backed loans, it's a good thing Congress has taken steps to address the situation.
A bill called the Emergency Student Loan Market Liquidity Act recently passed the House of Representatives earlier this month, and an amended version was recently approved by the Senate. According to the Associated Press, President Bush has urged fast action on this bill to make sure students will have access to funding in the coming school year.
Click Here For a Free Bankruptcy Evaluation
If the House approves the modified version and Bush signs it, the bill will allow the government to temporarily buy more student loans from lenders, thus increasing their profitability and encouraging increased lending as well as giving some students greater access to federal loans.
Updates at Total Bankruptcy
For the latest news on this important issue, frequently visit this new section, Student Loans Amidst the Credit Crunch.