Cheer Up Charlie

Oh, the global credit crunch. While it may sound like a puffed rice candy bar, no one is jubilant about finding this golden ticket. The squeezing of the global economy is affecting nearly everyone, but one particular demographic could really be feeling the burn. In the U.S., students, arguably some of the poorest Americans, could see their education jeopardized when it comes to the availability of student loans.

For those concerned about the credit crunch, it is more likely that the worry is about a tightening of personal finances, as opposed to a worry about funding for college. For those unaware of the crunch, it is important to know why student loans are being threatened in the first place. This means looking into the epicenter of the quake, the subprime mortgage crisis.

During the U.S. housing boom in the early 2000s, lenders gave mortgage loans to high-risk, or subprime, borrowers with the idea that housing prices would continue to rise and allow for more favorable refinance options. The fall-out was the burst of the U.S. housing market in late 2006. The crisis has had widespread affects on mortgage lenders, banks, and other financial institutions.

Less money in the banking sector coupled with less confidence in borrowers means a tightening of the loan market. In an interview with the Baltimore Sun, M&T Bank spokesman Philip Hosmer explains that “the market some lenders use to raise money to make loans has dried up in the fallout from the subprime mortgage loan crisis. M&T raised money by bundling student loans and selling them as bonds to investors.” M&T is one of three large lenders that recently announced they would not be making new student loans.

Analysts of the financial aid and student loan market are trying to keep optimistic. It is touted there will be no change in student loans guaranteed by the federal government. Loans, such as Stafford loans (that hold interest rates around 6%) are guaranteed to all students. However, there are limits to these loans. Students can only borrow $3,500 freshmen year, $4,500 sophomore year, and $5,500 for junior and senior year.

Perkins loans, however, will be more scarce in the upcoming year. These loans typically go to the students with the most economic need and are held at the enticing interest rate of 5%. The reason Perkins won’t be available is two-fold. The federal government has not adjusted its pool of funds to keep up with rising college enrollment costs. Also, the high interest rates that come along with the credit crunch and economic recession make it necessary for those with existing loans to hold them longer. This leaves little capital to be lent out to students in need. No child left behind indeed.

How is this affecting whether to choose between Harvard or Harvard on the Pike? According to Mark Kantrowitz, a publisher of FinAid.org, eligibility will be the key difference affecting student loans. For students applying for private loans, they will need either excellent credit, or a co-signer that will guarantee to repay the loan. This, once again, short changes those students at the bottom of the economic pyramid. Those who truly need to take out private loans may find themselves unable to afford their first choice schools due to funding. Settling on an in-state second choice school may indeed be reality, but for some it limits educational opportunity. Thus proving, that the American dream does, indeed, have a price-tag.

What is a prospective student to do? Those who plan on taking out around $5,000/year need not worry, subsidized or unsubsidized Stafford loans will pick up the tab. Those trying to go to private school need to secure government backed Parent Plus or Parent Loan for Undergraduate student loans. If that fails a last resort is to panhandle on the street. Now, when you are begging credit-worthy passersby to be your co-signer, tell them they're not just sponsoring your education, but their sponsoring their country's future. If recent history has proven anything, a rally to patriotism is surprisingly convincing. Lastly, to leave with one last bitter sip of reality, even if your loans do come through, and you attend the university of your choice, don't be surprised if you scrounge your way through college eating cabbage soup with Grampa Joe.