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Credit Market Disruptions Are Not Jeopardizing Federal Student Loans

On March 12, the National Association of Student Financial Aid Administrators released a statement in response to recent reports in the media about student loans being affected by the credit market disruptions. Alarming reports have many families worried that student loans won’t be available this fall. However, NASFAA reports, financial aid administrators, schools, federal lawmakers, the U.S. Department of Education and student loan providers are all working together to ensure that no student is denied access to federal student loans.

To date, NASFAA is not aware of any student being denied a federal student loan due to market conditions. Even in instances where student loan providers have suspended participation in the federal loan programs, other loan providers have stepped up and filled in. Should conditions worsen to the point where they could affect the availability of federal student loans, NASFAA has received assurances that federal lawmakers, the U.S. Department of Education and other federal agencies will take appropriate actions to ensure an uninterrupted supply of low-cost federal student loans to students and families.

News reports often blur the line between federal and private student loans, but understanding the difference between the two is crucial. The vast majority of student borrowers use federal student loans. Federal student loans — such as Stafford and PLUS loans — are backed by the federal government. Federal student loans are not dependent on borrowers’ credit scores. The repayment terms and conditions are specified by federal law and are usually better than private loans. Interest rates and fees on federal student loans will not increase, the group says.

A far smaller group of students relies on private student loans or other forms of consumer financing, like home equity loans. These students turn to private loans if they cannot cover their cost of attendance with federal, state and institutional financial aid — including federal loans. Like other consumer loans affected by the subprime mortgage meltdown, private student loans will be costlier for some borrowers at some institutions this academic year. However, NASFAA advised that students and parents should only use private education loans as a last resort. Before borrowing private loans, students should exhaust all the federal, state and institutional financial aid available to them.

In a March 20 letter, NASFAA President and CEO Philip Day sent a letter to Margaret Spellings, secretary of the U.S. Department of Education, calling on the federal government to put three “safety nets” into place to ensure “all federal loans remain accessible to all eligible students.”

The three “safety nets” are:

• Modifying the Lender of Last Resort program to allow institutions (as opposed to students) to demonstrate that there is a loan access problem, so that borrowers won’t bear this additional burden.

• Ensuring schools who wish to transition to the Direct Loan program can do so with as little administrative and financial burden as possible. Any disruption caused by operational complications would have the greatest negative impact on the most vulnerable students, who may be discouraged from attending college if the aid process becomes any more complex or cumbersome.

• Providing an infusion of liquidity to the student loan market so that nonbank lenders will be able to provide student loans and other benefits to students this fall, and to increase confidence in a crucial part of the capital market.

NASFAA is a nonprofit membership organization that represents more than 13,000 financial aid professionals at nearly 3,000 colleges, universities and career schools across the country.