ARCHIVED POST – America’s largest not-for-profit guarantor of private student loans declared bankruptcy Monday night. The Education Resource Institute or “TERI” explained its decision to seek Chapter 11 bankruptcy by citing a sharp increase in the number of borrowers defaulting on their loans plus the troubled credit market. TERI currently has more than $17 billion in outstanding guarantees. How could TERI’s announcement impact you? For current borrowers, your loan will likely be unaffected. Future borrowers, however, may encounter problems. Here’s the rundown on some possible scenarios.
How Guarantors Work
When you are approved for a student loan, the bank or lending organization seeks a guarantor to repay the loan should you default on it. The guarantor covers the bank’s costs – and then turns around and pursues collections from you to cover its expenses. For federal student loans, that guarantor is the federal government. I.e. Congress foots the bill if you default on your loans. But it’s not a free ride, since the government will actively pursue you until it gets its money back – usually either by garnishing your wages or intercepting your tax refunds.
What Happens Now That TERI’s Out of the Picture?
Without a guarantor like TERI for private student loans, banks may seek other ways to cover their risks. According to Christopher S. Penn of the Financial Aid Podcast, they might do this by raising their standards for evaluating your credit history before approving a student loan. Your credit score (aka, FICO score) utilizes mathematical models to determine a single, numerical value that represents your credit history. Unless your history is flawless, many banks won’t be willing to risk that you’ll reliably pay them back.
Penn says another way banks could cover their increased risk is by raising interest rates across the board. Even if a higher percentage of borrowers are defaulting, banks could still run a profit from the increased interest being charged on each loan. For a new private student loan holder, this potential interest hike could cost several thousand dollars more over the life of the loan.
Of course, increasing interest rates and denying loan applications are just supposition at this point. If you’ve exhausted all other options for paying for college – including federal student loans, grants and scholarships – then start talking to lenders now about how TERI’s announcement may affect your private student loan offer.