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Home » FAFSA, Federal Aid, Financial Aid News, Student Loans Info

A Silver Lining for Students: More Federal Student Loans Are Available

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Credit is retracting in nearly every sector – home mortgages are dwindling, business loans are down, car loans are non-existent.  But there is one area in which credit has actually expanded: Government-backed, higher education loans. The total number of student loans made in 2008 is up 18.6% from 2007, according to an article in today’s Wall Street Journal.  Home mortgages, on the other hand, were down 38%.

At the same time that federal lending has increased, private education loans have shrunk.  Thirty-nine private lenders stopped making private loans, according to the WSJ.  The private loan sector, which accounts for one-fifth of total education lending, fell by as much as 25% in 2008. The Federal Reserve Bank is trying to kick-start private lending with a $200 billion program to encourage securities in the private loan industry.

But I’m wondering if it’s such a bad thing that the private loan sector has taken a hit. (Warning: I’m about to get up on my soap box!) Here’s the thing: On the one hand, federal student loans may not be enough to cover a family’s total need — which means students may have to transfer to less expensive schools, or drop out all together. In those cases, private loans may be a last ditch lifeline for students who are literally on the edge.

On the other hand, many students take out private loans without even applying for federal loans. In fact, according to a 2007 study by the American Council on Education, one in five undergraduates forego federal loans for private loans. And yet, private loans carry higher interest rates and less attractive terms. So why wouldn’t a student avail themselves of the lower interest rate, better term loans through the federal government?

There are a couple of possible reasons:

1) Students assume they have (or their family has) “bad credit” and therefore will not qualify for federal loans. The advertising campaigns of many private loan companies actively encourage this misconception.

2) Students are daunted by having to fill out the student loan paperwork — namely the FAFSA (the Free Application for Federal Student Aid). Private student loans seem easier. In reality, the FAFSA takes less than an hour to complete and is your key to all forms of federal aid, not just loans.

3) Students may not even realize that private and federal student loans aren’t one and the same. Active marketing on campus has confused many students, at least according to the countless recent newspaper articles on the subject.

Whatever the reason, the bottom line is that at least 20 percent of students eligible for federal loans are not getting them because they aren’t even applying for them.  And instead, they are signing up for the costlier private loans. Which means that when they graduate, the burden of their student loans is even greater than it has to be.

So, I’m thinking that the federal student loan industry growing by almost 19% and the private student loan industry shrinking by as much as 25% might just be a good thing for students.  What do you think?

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