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The Student Loan Crunch: Cause for Concern

-by Thomas Hauck

College families don’t need anyone to tell them that college costs are soaring. According to The College Board, the average cost of a private four-year college is now $25,143 per year. In response, more and more families are taking out student loans to pay for college education. But due to the current recession, as demand increases the supply of loans may be decreasing.

A recent survey conducted by the National Association of Student Financial Aid Administrators (NASFAA) confirmed that many student financial aid administrators are concerned about access to the student loans. More than half surveyed say that the government’s response to the recent credit crunch has been inadequate, and that the recently enacted Ensuring Continued Access to Student Loans Act (ECASLA) does not fully address the growing problem of access to student loans.

Parents may find that while ECASLA temporarily eases student loan availability, longer-term solutions are needed. There are provisions in ECASLA that may encourage students and their families to sign with multiple loan providers, but parents and students are rightfully reluctant to simply take out more loans and be saddled with burdensome loan repayment obligations.

Financial aid officers are using creative methods to help families affected by the student loan crunch. But colleges and universities may not have all the answers; only one-quarter of financial aid offices have backup plans to make up for any shortfall in federal or private loans. At the time of the survey, only twenty percent said they would have a backup plan in place for the academic year 2008-2009.

Preferred Lender Lists: Phased Out?


To make it easier for students to identify reliable lenders, schools have traditionally maintained a Preferred Lender List (PLL) . Many schools that maintain PLLs provide a link to an outside website that offers a list of lenders or student loan comparison tools. But because some new federal and state laws and regulations make the lists too difficult to maintain, or expose the school to legal risk, in the past year there has been a sharp increase in the number of schools dropping the list.

Another big concern for college families is that student loan providers, spurred by the tightening credit market, increasingly are engaged in seemingly discriminatory lending practices. Some of the largest Federal Family Education Loan Program (FFELP) lenders recently announced that they will no longer lend to some career schools, community colleges, and private schools that have either students with higher default rates, or (paradoxically) students with lower-than-average loan amounts.

According to college financial officers, the problem is widespread and lenders don’t even try to hide it. More than half of the financial aid officers stated that a FFELP lender had notified them that students at their institution could no longer take out loans with the company, even though students at other institutions would still be serviced. Not surprisingly, low- and moderate-income students are the most impacted by these discriminatory lending practices

Federal protection may be required. Most survey respondents said Congress should pass legislation mandating that student loan providers grant federal loans to all qualified students, regardless of the institution attended.

College families are encouraged to compare colleges and financial aid packages to find the most advantageous deal, and to seek professional advice in negotiating the maze of financial plans available in the marketplace.

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