17% Swell in College Financial Aid Submissions Hints at Economy’s Effect on Families

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More families are appealing to the federal government for help this year in paying for college, as parents face a shrinking job market, record-high food and gas prices, and tightened borrowing restrictions that have grown out of the current credit crisis.

Submissions of the Free Application for Federal Student Aid (FAFSA) are up 17 percent this year, according to a recent report released by the U.S. Department of Education. Never before has the Education Department been bombarded with so many FAFSA submissions, totaling 9 million for the 2008-09 school year — 1.3 million more than last year, even though only 300,000 new students are expected to enter the higher education system this fall.

The students who have traditionally relied on federal student loans to pay for college are being joined, say financial aid experts, by over a million additional students whose families have previously been able to pay for school on their own but are now in need of federal financial support.

“What we are seeing is more people filling out requests for financial aid,” said Richard Toomey, associated vice provost at Santa Clara University. “Students who haven’t needed assistance before are coming in.”

As Economy Hits Student Loan Lenders, Schools Turn to Federal Government

Typically, in the summer months before school starts, student loan providers would be saturated with potential borrowers shopping for federal and private student loans. This year, in particular, with the economy in a downturn and unemployment as its highest level in five years, lenders would expect to be processing a larger-than average volume of student loan applications for the growing number of families in need of financial assistance — that is, if the lenders weren’t being affected by the sinking economy themselves.

Caught in the ongoing credit squeeze, a number of lenders of non-federal, credit-based private student loans have been forced to suspend their private student loan programs.

And lenders of federal college loans aren’t faring much better.

Last fall, Congress passed federal legislation that cut over $21 billion in federal subsidies to lenders in the Federal Family Education Loan Program, rendering the government-backed parent and student loans made through these third-party FFELP lenders essentially unprofitable. Compounding these lenders’ sudden loss of government subsidies are the general troubles in the student loan credit markets, part of the far-reaching aftershocks of the subprime mortgage meltdown.

Many of the non-bank FFELP lenders secure the capital they need to make new federal college loans by packaging and selling their student loan portfolios in the secondary market. But investors, still skittish after the collapse of the subprime and Alt-A credit markets and wary of any kind of defaults in the face of spiraling foreclosure rates in the housing sector, have stopped buying packaged student loans. Without buyers for their federal student loan portfolios, FFELP lenders aren’t able to generate the liquidity necessary to fund any new federal parent or student loans.

Even after the government passed emergency legislation in May in the Ensuring Continued Access to Student Loans Act that would allow the Department of Education to purchase federal student loan portfolios from FFELP lenders as a means of providing these lenders with the capital they need to originate new student loans, FFELP lenders have simply been unable to come up with the money they would need to fund an initial portfolio they could sell to the government.

Cash-strapped and in a liquidity crunch, over 100 FFELP lenders to date have suspended their federal student loan programs, leaving hundreds of thousands of students and parents looking for a new lender for their federal college loans.

Fearing the increasing instability of the FFEL program, nearly 300 colleges and universities so far this year have already applied to join the more than 4,600 schools enrolled in the Education Department’s Direct Loan Program, through which students receive their federal parent and college loans directly from the government rather than through a third-party FFELP lender. In a recent survey conducted by Student Lending Analytics, 40 percent of college administrators said they were contemplating the switch from the FFEL program to the Direct Loan Program as well.

Private Student Loans Harder to Come By

Many families who have relied on private student loans to supplement their federal grants and college loans are also on the search for new lenders as providers of non-federal private student loans face the same liquidity crunch as FFELP lenders.

Those private loan providers that haven’t yet suspended their private student loan programs have been forced to tighten their credit requirements in response to investor concerns.

Under these more restrictive credit criteria, the majority of college students, who typically have little or no established credit history, will likely not be able to qualify for a private student loan without a co-signer. And with foreclosures rising and families struggling to pay their bills, a student’s parents or other family may not qualify as co-signers either. Whereas last year, a student or co-signer with a credit score of 620 might have met the minimum credit-score requirement for a private student loan, many lenders are currently accepting only minimum scores of 700 or higher. The average national credit score, according to Experian, is 694.

The stricter credit criteria and growing scarcity of private student loan lenders are already having a dramatic impact on the number of students who will be able to rely on private student loans to help them pay for college this semester — particularly those low-income students who may need the most financial assistance but are the least likely to qualify under more stringent credit and income requirements.

At community colleges and career-training schools, for example, where lower tuition costs are particularly attractive to low- and middle-income families, only 25 to 35 percent of the students have been approved for private student loans this year, according to Harris Miller, president of the Career College Association, compared to the 75 to 80 percent that qualified last year.

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