Credit Cards and Consumer Debt
The Credit Crunch and Student Loans

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By aj485
February 5, 2008

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Another WSJ article, on student loan tightening:

Despite the Federal Reserve's latest rate cuts, lenders are raising rates and fees on some student loans -- and making others harder to get.

In recent months, average rates on private student loans have increased by about 0.5% to 1%, says Mark Kantrowitz, publisher of Last month, for example, MRU Holdings Inc.'s MyRichUncle raised some rates on its private student loans, following College Loan Corp. and SLM Corp.'s Nellie Mae, which raised rates on their private student loans last year.

SLM's Sallie Mae and First Marblehead Corp., another big provider of private student loans, told analysts that they expect to change the pricing on their private loans to reflect market conditions. Last week, First Marblehead told analysts that it was tightening its credit criteria to focus on "high-quality borrowers" and was "in the process of increasing fees and rates that borrowers will pay."

There are more examples of issuers not offering loans, including government guaranteed loans and consolidation loans, in the article.

Here is why student loans are being impacted:

The moves stem from the fact that many lenders raise money to fund a wide array of consumer loans, including student loans, by selling pieces of that debt to other institutional investors, a process known as "securitization." But as fears over defaults in loans backed by mortgages continue to spread, investors have backed away from buying any type of securitized debt.

One small bright spot for those who have variable rate loans:

There's one bright spot for borrowers who still have variable-rate federal student loans issued before July 1, 2006: The Federal Reserve's recent round of rate cuts should result in big interest-rate savings if they wait to consolidate.

Borrowers who consolidate their loans on or after July 1 -- when interest rates on these loans reset -- could lock in rates of less than 4.25% and 5% on their government-backed Stafford and PLUS loans, respectively, says FinAid's Mr. Kantrowitz. That compares with a consolidation rate of 7.25% and 8.125% for most Stafford and PLUS loan borrowers, respectively.

Lessons to be learned:

- Be sure your children have good credit before trying to apply for student loans - they should go through a process similar to checking credit before buying a house, and clean up any errors.
- If your children have credit that requires payments while they are in school, be sure they understand the importance of making the payments on time, especially if they need student loans to pay for school.
- This article, plus the one that Windowseat provided a link to on credit cards, shows the credit crunch is spreading from mortgages to other forms of credit. If you have any borrowing to do, including balance transfers, it is imperative that you keep your credit as pristine as possible during times like these. For instance, if you have open credit lines that you were considering closing, just leave them open for now. If another of your lines is closed for some reason, you may need the one you were considering closing.