Access To Stafford Loans Diminishes Somewhat

July 28, 2008
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GRAND RAPIDS — More lenders are backing away from the federally backed student loan business because of rising default rates and cuts in federal subsidies to institutions that lend to college students.

As of early July, 63 lenders had either suspended or limited their participation in the Federal Family Education Loan Program, according to the National Association of Student Financial Aid Administrators.

At the same time, lenders have tightened standards for private college loans.

FFELP has provided more than $567 billion in low-cost loans to tens of millions of students. Schools participating in FFELP use private lenders to make federal student loans. Stafford loans, which are the largest component of FFELP, supply nearly $46.8 billion in aid for college each year. FFELP supplies about $8.3 billion in PLUS loans, which allow parents to borrow up to the total amount of their children’s undergraduate education.

Borrowers can also get a consolidation loan through FFELP and combine all their federal education loans into one loan with a single monthly payment.

ASFA estimates that approximately 7 million borrowers will need more than $68 billion in federal loans this academic year. The association further expects that any disruption in student loan access will affect the nation’s neediest students more negatively than others. Some lenders have already announced they will not lend to students attending schools that tend to have greater default rates or are of specific types, such as career or two-year schools.

“Proprietary institutions and community colleges have been hit the hardest because some private lenders are choosing what schools they want to participate with,” said Ed Kerestly, GVSU’s director of financial aid. “In general, the riskier borrower is one who’s at a community college or proprietary school.”

Chase, for example, continues to offer both federal and private student loans, but with the reductions in federal student loan subsidies, the bank now looks at the situation school by school, said spokeswoman Mary Kay Bean. 

“We have gone school by school to determine whether it is profitable enough to offer federal loans to students at the schools,” Bean said. “We looked at several factors such as the repayment history of the school’s alumni, the size of loans and the length of the loan. So we continue to offer federal loans to schools that meet our profitability standards.”

Dave Steffee, director of financial aid for Aquinas College, said this spring Aquinas moved from FFELP to the Federal Direct Loan program because several of the school’s major banks backed out of FFELP. Under the Federal Direct Loan program, loan funds from the federal government are channeled through the school directly to the student. No banks or lending institutions are involved with the federal direct loan program, which streamlines the lending process. Steffee said that, as a result, Aquinas students are not having difficulty securing federal loans.

“The difficulty is primarily with alternative loans, which are private loans that some major corporations and banks have available for students to borrow,” Steffee explained. “Those are the ones students may have more difficulty in securing due the changes that have occurred in the last six months.”

Grand Valley State University students don’t appear to be having difficulty in the federal loan department either, because GVSU also participates in the Federal Direct Loan program.

“There are a number of colleges and universities that have re-evaluated participation in either FFELP or the Federal Direct Loan program. Some have chosen to find new lender partners that participate in FFELP,” Kerestly said.

National City, for instance, makes FFELP Stafford federal loans and PLUS loans and has participated in the FFELP program for 40 years, according to Sean Welsh, regional president for National City in West Michigan. National City also pays the federal student origination fees for all of its Stafford borrowers, keeping its zero federal fee policy unchanged, he noted.

“The FFELP program continues to be an important part of our student lending portfolio,” said Sean Welsh, regional president for National City in West Michigan.  “National City is committed to doing what is right for its borrowers and supporting their complete education funding experience.”

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