Private lenders have been pulling out of the student loan industry in droves as investors hesitate to buy loan-backed securities in a national economy greatly weakened by the sub-prime mortgage crisis.
But the adverse effects of the student loan squeeze have yet to directly impact Michigan students, said Margaret Rodriguez, senior associate director of the Office of Financial Aid.
“Based on our contacts with students and their families, we are not aware that U of M students are having difficulty obtaining private loans this year,” she said. “Due to the high graduation rates and low student loan default rates of U of M students, they are considered a good risk.”
University students default on their federal loans about one-third as frequently than the average at other public universities, though the University of Wisconsin at Madison, Michigan State University and the University of Illinois at Urbana-Champaign all have lower Cohort Default rates than the University for 2006. The University’s graduation rate — one factor loan companies use when deciding who to lend to — is also well above average.
Nationwide, private lending has increased more than more than tenfold in the last decade to $17.1 billion annually, The Wall Street Journal reported.
According to the Journal, about one in ten students now seek private loans, though this trend is expected to reverse in the near future.
Pam Fowler, the executive director of the Office of Financial Aid, would not compare the current student lending market to previous years, but said having to borrow money for school is generally difficult for students.
“As a student who has to borrow, you’re between a rock and a hard place,” said Pam Fowler, the executive director of the University of Michigan’s Office of Financial Aid. “You either take the loan, if you can get the loan, or you don’t go to school. Or you go someplace you didn’t want to go”
The private lending squeeze leads to higher interest rates, more selective qualification criteria, and stricter repayment terms. It also increases the burden on federal aid — Free Application for Federal Student Aid (FAFSA) submissions are up 17 percent this year, according to the U.S. Department of Education.
Fowler said students should pursue federal loans rather than private loans. though many pursue private loans when they discover they aren’t eligible for financial aid. She added that everyone can get a federal loan, which has better repayment terms and maybe cancellation provisions private loans don’t have.
“Some students know they’re not eligible for financial aid, so they go get a private loan,” Fowler said. “If they make that assumption that because they don’t qualify for a Pell Grant, ‘I’ve gotta go get a private loan,’ that’s what we’re trying to stop.”
Here at the University, students borrowed about $256 million in both private and federal for the 2007-2008 academic year, according to data provided by the Office of Financial Aid.
According to the data, 9,586 undergraduates borrowed federal money through these programs last year, with loans totaling $71.8 million. For graduate students, 5,511 borrowed $132 million.
For the same time period, 1,809 undergraduates and 1,009 graduate students borrowed $23.6 million and $28.6 million, respectively, in private loans.
There are two federal Direct Loan programs available at the University. Undergraduate students may borrow through the Federal Direct Stafford Loan Program, and their parents can borrow on their behalf through the Federal Direct PLUS Loan Program. Graduate students have the same two options, although the Federal Graduate PLUS Loan Program has slightly different terms.
The University participates in the Federal Direct Loan Program, which the federal government supports directly. The Federal Family Education Loan program, which was used at many other Michigan colleges and universities before the state suspended it in the spring, is the same program with the only difference being the source of capital: FFELP borrowers are subject to private liquidity issues.
The “Ensuring Continued Access to Student Loans Act,” passed by Congress in May to cut interest rates on federal loans and make education more affordable, was intended to make good on a 2006 pledge by House Democrats.
But for University of Michigan students, this is all inconsequential since the act only applies to loans provided through FFELP.
Fowler said that the single biggest mistake families make when it comes to financing an education is poor planning.
“Planning for college, in my mind, cannot start in the junior or senior year,” she said. “I’m talking about early awareness, early planning. I’m talking about sixth grade. You can’t conceivably come up with that kind of money or a plan to do that 9 months before the kid hits the door.”
The Office of Financial Aid has outreach programs designed to inform students and parents about college and its costs from early on.
Too many students don’t take the process seriously enough or pay close attention to the terms of their loans — even those who have gone through with this process before, Fowler said.
“They won’t read it, they won’t deal with it until it comes time to repay,” she said. “That’s when it becomes important to them and, unfortunately, it’s a little too late.”