Chastened by the ways banks have pulled back from making loans to home buyers with less-than-perfect credit, Washington has rushed to make sure that students (who usually have little or no credit history) can borrow enough to pay tuition in the fall.
President Bush today signed an emergency law that will make it easier for students and parents to borrow more this fall. Congress raised by $2,000 a year the maximum students can borrow through the federal Stafford program, which charges no more than 6.8 percent in interest (plus another 2 percentage points in fees). And it gave a break to parents, too, by allowing those struggling with mortgage bills to still get a PLUS loan and allowing all new PLUS borrowers to defer repayment until the child leaves school.
While those changes were praised by student and parent groups, private lenders were less enthusiastic. The changes to the federal loans will most likely eat into the highly profitable private, or alternative, market, says Rick Vonk, who heads education lending for Key Bank. And a provision allowing the U.S. secretary of education to purchase federally guaranteed loans made by companies such as Key Bank will bring investors and lenders back only if the secretary buys them at prices that return a profit, Vonk says. Yet there's no guarantee that the department will be willing or able to do that in time for this fall's loan application season, which will start July 1. "There is no light at the end of the tunnel yet," Vonk says.
Dozens of his competitors, in fact, have already given up and suspended making student loans. Early last week, even as the rescue plan was being prepared for Bush's signature, First Marblehead, one of the nation's biggest packagers of private student loans, announced that while it would stay in business, it had laid off half its staff.