The recent sub prime mortgage crisis will soon effect students who rely on college loans, according to a recent report by financial aid guide FinAid. Furthermore, all student borrowers, not just sub prime borrowers, will see tighter lending methods.
Some problems could be the need for higher credit scores to get student loans along with higher interest rates on those loans. Major lenders will become more selective when granting loans.
As early as last July, student loans and other asset-backed securities felt the sub prime market's effects along with the mortgage world. Investors are becoming skeptical of the rising number of default and foreclosure rates.
Also, lender subsidy reductions as a part of the College Cost Reduction and Access Act passed in 2007 have made federal and private education loans less profitable for lenders. This will likely cause lenders to pass this burden on to the borrowers.
Expected changes from this sub prime crisis are:
1) Overall private student loan interest rates will be dramatically higher.
2) To qualify for a private student loan, a borrower will need to have a credit score of at least 650, a jump from the previous 620.
3) An elimination of borrower benefits.
4) An increase in minimum balance requirements for loan consolidation.
According to FinAid, you may also expect several changes to federal student loan policies. Expect that loan consolidation will be discouraged, maximum balances for loan consolidation will increase upwards to around $10,000, and loan discounts will be reduced.
Recently investors have been walking away from investing in student loans which means a drought will be forthcoming this fall in relation to the availability of student loans. Lenders are also expected to focus most of their marketing on private student loans and away from federal loans, costing borrowers more.
Keith Landis
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