As the economy changes, so do options for student loans. In times of steady growth, the amount of federal student loans available remain steady as does the interest rate which is established by Congress. At this same time, private loan sources maintain fairly low rates and advertise more flexible terms. When there is a recession and private loan sources become more difficult to secure, the federal student loan programs expand to provide for those students who now may not qualify. Identifying the trends and paying attention to information from federal loan programs and private lenders can help students and parents find the best options for their educational needs.
Let’s use the last six years as an example. Prior to the sub-prime mortgage crisis that began in 2007, the annual growth rate for the federal student loan programs was about eight percent, going all the way back to 1992. The growth rate for private student loans in this same period ranged from 25 to 35 percent per year. In 2008, the Ensuring Continued Access to Student Loans Act was passed to increase the limits on the Stafford Loan Program. The new limits provided enough funding that a significant amount of students looking for loans shifted from private to federal sources. According to the College Board’s Trends in Student Aid; the volume in private student loans dropped by half in 2009.
Although the economy is recovering now, it is at a much slower pace than with previous recessions. Because of this, there is now legislation being considered that would expand the Perkins Loan Program from $1 Billion to over $8 Billion per year. If it passes, this will cause another shift from private to federal student loans. If it does not pass and other student loan programs remain static, then the private student loan market should return to 25 percent growth and will increase past federal student loan levels by 2030.
Even when the economy is roaring along, most private student loans are more expensive than their federal counterparts. Borrowers in search of loans need to start with the Free Application for Federal Student Aid (FASA) form. This form analyzes a student’s needs against not just the federal loans, but also work-study programs, grants and other student aid options. For most students, a combination of these options should meet their needs. If a borrower has either been rejected from or has exhausted their federal student loan benefits, then he or she will need to turn to private loans. Student Debt Relief can assist students and parents to thoroughly research every option before turning to a private lender.
What make most private loans more expensive are the fees the lenders charge and the loan payment terms. A very attractive low interest rate that beats out even federal rates quickly disappears under a series of loan origination and other fees. Borrowers need to keep in mind that fees of three percent of the total loan work out to about a full percentage point in interest. Between that and a longer loan term with a lower Annual Percentage Rate, a borrower can quickly find themselves with a higher payment than expected and still making those payments at a time when they should be putting money aside for their children’s education.
Also, it is a common practice for private lenders to advertise two interest rates: A lower rate that applies only during the in-school time and grace period following graduation or leaving school and then a higher rate that begins once monthly payments are scheduled to begin. (2) For example, a private lender may advertise their interest rate as PRIME + 0.10 percent for a student’s entire four years in college. After leaving school, that rate may jump to as high as PRIME + 0.50 percent or higher. The term PRIME refers to the best loans rates available to those borrowers with excellent credit. It’s not a deceptive practice, but lenders know that very few students are looking out past their freshman or sophomore year, let alone after graduation.
Fortunately, Student Debt Relief is here to help navigate the student loan options, watching for trends with private lenders and staying on top of changes to federal student loan programs. Higher education is an excellent step towards a better future. It shouldn’t also be the first step towards bankruptcy.