The credit crunch that caused bankers around the country to stamp "REJECTED" on millions of college loan applications appears to be easing. Banks, credit unions, nonprofits, and new alternative lenders are approving more and cheaper tuition loans with variable interest rates starting as low as 1.8 percent for parents and even a few creditworthy students. And they are attracting parents with opportunities to switch responsibility for payments to the student after a year or two of payments.
[Read about new web tools that can help you find a cheap student loan.]
Although they are offering some bargains, lenders advise all students to apply first for federal aid, including low-cost government loans, by filling out the Free Application for Federal Student Aid. The Department of Education lends undergraduates as much as $12,500 a year in Stafford loans at fixed rates as low as 4.5 percent without cosigners or credit scores. And it offers students unique perks such as income-based repayment and loan forgiveness for public service. Most young adults haven't built good credit scores, so they don't qualify for private loans without cosigners. And private lenders such as Sallie Mae, banks, and credit unions only give the cheapest advertised rates to families with top credit scores.
Parents who want to borrow to pay their childrens' college bills have different considerations. The federal parent loan program, PLUS, lends parents with minimally acceptable credit their student's full cost of attendance (after subtracting out other financial aid). It also offers perks such as the chance to defer payments while the student is in school, and free insurance that cancels the loan if the student or parent dies. But the PLUS annual percentage rate is fixed at about 8.8 percent, after fees. And PLUS borrowers could have a hard time getting out of financial trouble because educational loans are rarely discharged in bankruptcy.
[Read about 2010's cheaper and easier federal student loans.]
While private educational loans are also hard to escape, recent law reforms and improvements in the economy have sparked seven big improvements over the high-priced, tough-to-get private loans of 2009.
1. Lower costs. The state-owned Bank of North Dakota is offering a remarkable bargain to students from—or attending college in—that state: a variable rate that currently rests at just 1.78 percent. (Of course, like all variable loans, it will get more expensive when interest rates rise above their current lows.) The bank will also make private loans to students from or attending school in neighboring states at 3.2 percent. Other lenders are cutting their rates as well. In May, Sallie Mae, the nation's biggest educational lender, stopped charging a 3 percent up-front fee, and cut its variable rates by about 2.5 percentage points. Better investment markets and repayment rates are allowing the company to offer other discounts, such as a new 2 percent rebate for on-time payments, adds Charlie Rocha, a company senior vice president.
2. Fewer rejections. More lenders are now approving loans to borrowers with FICO scores below 700, says Tim Ranzetta, who analyzes the lending industry at Student Lending Analytics. The Bank of North Dakota considers applications from students and parents with FICO scores as low as 575. Some members of Studentchoice.org, an association of credit unions, are waiving standard cosigner and citizenship requirements for students at highly ranked business schools.
3. Easier repayment. During the credit crunch, many private lenders started requiring borrowers to begin repayments immediately, instead of waiting until the student left college. But many of the credit unions who lend through Studentchoice.org are now allowing borrowers to defer payments while the student is in school. Starting at the end of June, Sallie Mae will allow borrowers to make token payments of as little as $25 a month.
4. More parent relief. Sallie Mae announced this spring that it would shorten the time period before allowing co-signers to apply for release from repayment responsibility from 24 on-time payments to 12. Of course, the company will only approve parental relief if the student has developed a good credit score. Many other lenders now allow parents to apply for release after 24 payments. And some credit union members of the Student Choice network are now offering no-cosigner private loans to students in some graduate business programs.
5. More choices. Private lenders are offering rates that rise and fall with LIBOR and rates that remain fixed at anywhere from 6 percent to 12 percent, depending on the borrower's credit score. Borrowers can choose among traditional lenders, neighborhood credit unions, or new peer-to-peer lending websites. At People Capital's new anonymous student loan auction site, lenders only see financial and academic information, without knowing the name of the borrower. The bidder with the lowest interest rate wins the right to lend the student money.
6. Clearer information. A 2009 government crackdown led to new laws requiring lenders to give specific rates, terms, and costs before borrowers commit to a private student loan. Lenders must also now warn applicants of the maximum monthly payments they could face.
7. More consumer protection. Year-old reforms to the federal Truth in Lending Act require private lenders to give students and parents 30 days after a private loan is approved to decide whether they want to take the money. Lenders cannot change the terms in those 30 days. Borrowers also now have three days after they accept a private educational loan to change their minds.
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