Looking for a student loan? They're still available, but you'll need a clean record

[cashlenders]

June 4, 2008

While most attention has been focused on faltering credit and housing markets, the federal student-loan market received a fairly quiet bailout.
more stories like this

College loans will still be widely available, although with greater scrutiny of credit records.

The student debt market was chilled by securitization issues in much the same way that subprime mortgages stumbled last year. Secondary markets for student debt froze, and lenders stopped offering loans.

Thanks to a law signed last month, the Education Department agreed to buy federally guaranteed student loans for the 2008-2009 academic year and will be a lender of last resort. It's also funding a $30 billion direct-loan program and will make consolidation loans unprofitable for private lenders.

The government also said it will buy loans from SLM Corp (Sallie Mae), the largest US education lender. The company had threatened to leave the federally guaranteed loan program.

Lenders aim to avoid loans that may default. More than 80 have pulled out of the market, although several have reentered since the Education Department's announcement.

A tighter lending environment doesn't mean you can't get a loan deal. This is prime time for borrowers to consolidate loans. Savings can be substantial by locking in a relatively low rate.

The new rates, effective July 1, are roughly based on Treasury bills. Yields have dropped on these bonds over the past year due to Federal Reserve interest-rate cuts; federal student loans will follow.

According to Mark Kantrowitz, publisher of finaid.org, consolidation rates will fall to 3.625 percent for those in school during a grace period. Those out of college will pay 4.25 percent. The rate on parental PLUS loans is 5.125 percent.

New borrowers will also see rate cuts. The subsidized Stafford loan for those with demonstrated financial need will drop to 6 percent on July 1, from 6.8 percent. Over the next four years, that rate will fall to 3.4 percent. Finding a consolidation loan through a private lender will be difficult; fewer banks will offer them.

Kantrowitz expects most lenders to stop offering consolidations over the next month. Your best and probably only source will be the federal direct-loan program.

"The advice to borrowers with variable-rate loans remains the same: Wait until July 1 to consolidate your loans," Kantrowitz says.

Skittish credit markets may force you to shop around more and endure longer application times, especially if your credit rating is below 600 on the FICO credit-rating scale.

Students and parents will face tougher credit checks. Lenders are taking a hard look at potential default risks, asking for more income verification, and denying loans to those they think may default. Lenders are also charging higher fees on loans, particularly those offered through private programs.