If you’re a college student or a parent of a college bound student, be prepared to see lower or no discounts on interest rates and higher fees on your education loans. Chances are you will most likely see fewer FFELP (Federal Family Education Loan Program) lenders on your list of options, too. Why? A combination of the College Cost Reduction and Access Act of 2007 (H.R. 2669) and the global financial crisis triggered an adverse effect on many FFELP lenders.
In a nutshell, H.R. 2669 instituted immediate increases in the cost incurred by lenders in making student loans - for both for-profit and nonprofit lenders. The changes were so dramatic for Consolidation loans that many lenders stopped offering them altogether. The changes for Stafford and PLUS loans were such that most loan discounts had to be cut or eliminated. For example, most lenders prior to the Act covered the origination fee charged by the federal government. That is no longer true.
Additionally, the financial crisis caused by subprime mortgages spilled over into student loans and caused a large increase in the cost of funds to lenders, resulting in more than 89 lenders suspending or eliminating all or part of their student loan programs.
Short-Term Solution
Over the past several months, lenders, colleges and the Department of Education have been monitoring the market to gauge the impact on students and their families. With increasing demand for college loans and fewer lenders in the market, there was a consensual fear that by August many students and their families would not have any loans available to them to fund their education.
As a short-term solution, the federal government enacted the “Ensuring Continued Access to Student Loans Act of 2008” (P.L. 110-227). This Act will allow the Department of Education to advance money to lenders to use to make loans. It will also enable the Department to serve as a Lender of Last Resort, which involves the Department advancing funds to guaranty agencies to make loans.
What Does This Mean For Students?
If lenders make use of funds advanced by the Department of Education or the Department utilizes the Lender of Last Resort program, there will be an impact for the student and parent borrowers whose loans are made with these funds.
Pros:
- No shortage on funds to make student loans for existing lenders. Parents and students should be able to obtain a loan for the upcoming school year.
- Many lenders who suspended their programs have started them back up.
Cons:
- If lenders cannot gain access to a private source of funds by June 2009, they will most likely be forced to sell the loans to the Department of Education.
- The Department may not honor the discount the lender was offering (and what caused you to choose them in the first place).
- Managing loans will be harder for borrowers. They could be faced with multiple lenders and billing statements. Every time they need information on their loans they will be forced to call multiple customer service departments. Twice as much time on hold!
Borrowers Beware
As you finalize your financial aid and admissions with your college, be sure you read the fine print in any communications from your student loan lender and school. It is possible that your lender may offer you a highly attractive loan discount but if your loan is sold you may lose part or all of your discount.
You may also want to know if your loan is being made by a guaranty agency through the Lender of Last Resort program. It is also possible that your loan is coming directly from the Department of Education through the Federal Direct Lending Program. In other words, you may have to do some digging to find out exactly who is making your loan.
Be a smart consumer – ensure your lender provides you with your loan terms and conditions, and is willing to disclose whether or not they may need to sell your loan in the future. It is also a good practice to compare 2 to 3 lenders before you sign on the dotted line.