Although the suspension of the Michigan Alternative Student Loan program will only impact a small percentage of University students who receive financial aid, it does have University financial aid officials biting their nails about the overall health of the student lending market.
On Wednesday, the state’s student loan agency, the Michigan Higher Education Student Loan Authority, announced that because of the ongoing tightening of credit markets, there wouldn’t enough available capital to continue funding the program.
Michigan Alternative Student Loans, or MI-LOANs, are commonly used as bridge loans that help students pay for college-related costs that aren’t covered by other federal or private loans.
The program stopped accepting new applications yesterday. The state student loan agency said it will resume making loans as soon as it can raise the capital to fund them.
According to the program’s website, more than 100 different Michigan colleges and universities are eligible to participate. Last year, about 8,500 MI-LOANs were given to students, totaling about $68 million, The Associated Press reported.
The suspension of the program stems from the current sub-prime mortgage crisis, which has tightened the national credit market and scared investors away from purchasing securities backed by student loans.
With so many borrowers defaulting on sub-prime mortgage loans, investors are now, more than ever, questioning the ability of borrowers to repay their loans.
According to Pamela Fowler, executive director of the University’s Office of Financial Aid, the suspension of MI-LOANs won’t have that much of an impact on the amount of financial aid available to students.
She said only 9 percent of University students had MI-LOANs in the 2006/2007 academic year, and said even fewer students have received aid from the program for the current academic year.
What worried her, she said, was the poor health of the student lending market as a whole. She said the suspension of MI-LOANs is a symptom of the market’s current struggles.
“My concern is what this will do to other lenders and their loan interest rates,” Fowler said. “I’m concerned that this will make the credit approval criteria for private loans a lot tougher for students, and make it more difficult for students to obtain financial aid.”
Fowler said other loan programs offered through the Office of Financial Aide can pick up the slack for the funds students would’ve obtained from MI-LOANs.
But if the credit market continues to tighten and interest rates continue to increase throughout the student loan market, she said University students could struggle to repay their loans.
“It’s not that money is drying so much as students will be paying so much more for access to those funds,” Fowler said. “And if other lenders tighten up and those rates go up, and federal loans fall short, what will that do to our students?”
Terry Stanton, a spokesman for the state’s Department of Treasury, said that while the Michigan Higher Education Student Loan Authority is worried about the suspension of the MI-LOAN program, there is nothing it can do to generate more capital and resume to program.
“It does appear that we need to watch the market to see how soon it returns to stability,” Stanton said. “And looking at when some of these issues may be resolved, I think that’s a little bit of a wait and see, as frustrating as that can be.”
According to Economics Prof. Matthew Shapiro, it could be a while before the market rebounds from its current credit woes.
“I see credit remaining tight for a considerable period of time, which will put pressure on borrowers of all types, including big businesses, small businesses and also student lenders,” Shapiro said.
He said banks are currently trying to rebuild their credit and build up their reserves in order to recover from the sub-prime mortgage crisis. And one clear way to do that, he said, is by issuing fewer loans.
“We’re in a situation now where there’s a high amount of caution in the financial system, and in giving credit to anyone,” he said. “Even to worthy companies and worthy students.”