Education and You 2008

Follow The Money

By Jennifer Woods,|Special to

If you’re in the market for a student loan, you may be pleasantly surprised to learn how much federal funding is available.

There are two types of loans available to students: federal loans and private loans. Federal loans, such as the commonly used Stafford loan, are safer because they’re backed by the U.S. government and generally have lower interest rates than private loans, which often have higher rates that increase over time and unlike most federal loans, require a credit check.

Industry wide,federal loans -- which make up the majority of student loans -- have been the least impacted by issues in the credit market.

“I have yet to hear of any student in the country who hasn’t been able to get a federal student loan because of the credit crunch,” said Michael Dannenberg, director of education policy at the New American Foundation.

Plenty Of Lenders

According to Dannenberg, while the credit crunch has caused anywhere from a half dozen to two dozen federal loan lenders to scale back, that is only a drop in the bucket as there are more than 2,000 student federal loan lenders out there.

In addition, he said, even if there is a complete meltdown in the market, there are safe guards to ensure that students will continue to have access to federal loans.

One such safe guard involves the federal government intervening to front money to non-profit guarantee agencies that would make loans for students. Another alternative is for schools to switch to the Department of Education Direct Loan Program – a move recently made by Penn State – which offers (with very slight differences) the same loans, interest rates and conditions as other federal loans.

The private loan market, while far from falling apart, hasn’t been as resilient to the credit crunch.

According to Dannenberg, the private student loan market, which accounts for about 10% of borrowers, has experienced an uptick in some rates from 0.50% to 1.00%. Also, some lenders have been expressing reluctance to issue private loans to borrowers, particularly higher ones attending higher cost trade schools with questionable track records

Sallie Mae recently stopped certain non-traditional private loan programs – which accounted for only about 3% of its student loan portfolio -- after finding that a disproportionate number of the loans were made to students that left school early or dropped below half-time enrollment and then defaulted on their loans.

However, aside from this, Sallie Mae, the top provider or federal and private student loans has largely managed to steer clear of the credit mess. According to Martha Holler, vice president of corporate communications, the company expects its federal and private loan originations to exceed $20 billion in 2008 and to increase by 15% in 2009.

Despite some recent difficulties in the private loan market, experts agree that federal loans are preferable to private ones because they are generally safer and cost less.

That said, a few issues remain.

Missing An Opportunity

The first is that many families aren’t taking advantage of federal funding.

According to Sallie Mae’s Holler, the application for federal aid, , is “the entry ticket for getting free money for college.” However, she adds that a recent Sallie Mae study found that 10% of families are aware of this application but don’t intend to complete one.

In addition, even if you do exhaust your federal loan eligibility, it may not cover the entire tuition cost.  The federal loan limit for a dependent undergraduate student is $23,000 in aggregate or as high as $46,000 for students with independent status.

In that case, there is another type of federal loan known as a PLUS loan, which you should consider.

The PLUS loan allows you to borrow up to the full cost of attendance for a college. However, unlike Stafford loans, these loans require a credit check, making it difficult for some families to secure. If you’re in that camp it’s a good idea to seek out a credit worthy co-signer as that can increase the likelihood of getting a PLUS loan and reducing interest rates.

If you are still having issues paying for college, you could also consider enrolling in a tuition plan. “This is a great interest free option that enables families to spread out their payments to the school over the course of the school year,” Holler said.

In addition, she advises getting a head start on financing by applying early to school and keeping in touch with the school’s financial aid office as they can be a great resource.