Wednesday, October 22, 2008

A Whirlwind of Credit Issues

Several months ago, around the time that Bear Sterns was bought by JP Morgan, there were signs of a waning economy on a significant scale. Now, there are strong indications that this “credit crunch” has begun to shift from speculation to reality.

An article published today by Doug Lederman in Higher Ed News, titled Surprising Impact of Student Loan Crunch, cuts through generalizations by analyzing a survey of 500 colleges:

When asked how the affected students were bridging the financial gap, survey respondents cited a range of responses, including participating in an institutional tuition repayment plan (52.6 percent of institutions), asking their parents to borrow federal PLUS loans for parents (48.8 percent), or paying with credit cards (34.3). But a staggering 45.8 percent of private colleges said that at least some of their students were “stopping out of school or switching to part-time status,” a finding that conflicts with the widely held notion that students had not, by and large, been seriously deterred from pursuing their studies. (Another 38.3 percent said they were working more, which, depending on the situation, can obviously also have a deleterious effect on academic performance and college completion.)

Higher Ed has published articles in the past where financial aid officers braced for an impending crisis that seemingly did not occur. Apparently, this issue is still unfolding for students across America. Students should not have to resort to paying their outstanding balance by using high interest credit cards, as opposed to lower interest student loans.

There is also indisputable evidence in other sectors, such as the automobile industry, that credit requirements are sharply tightening. Car dealerships are complaining that “the credit crunch will crush them,” according Jennifer Lawinski for Fox News. General Motors reported last week that it will only be offering auto loans to only those customers with a 700 credit score, and even these people will need to have 20% down payment.

The effect of the credit crunch on the student’s wherewithal to continue school has yet to be fully understood. What does seem clear now is that late summer indications of the threat being hyped and overblown, may now need to be revisited as the crisis extends into the winter and spring borrowing seasons. Many lenders are only now wrapping up their final disbursements before exiting the industry. While increased Federal lending limits have helped, they cannot make up for the loss of over 40 private lenders in the last year alone. These lenders often helped student’s bridge the gap between the federal lending limit, tuition costs, and the student’s ability to pay the difference out of pocket.

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