Dealing with college loan cutbacks

College money

TEXT OF INTERVIEW

Tess Vigeland: One of the biggest costs facing middle class families? College education for the kids.

All the 529 plans, scholarships and grants aren't likely to pay the whole bill these days, so you've got to rely on loans, but they may get harder to come by.

Sallie Mae, the nation's largest student lender, says it's going to be more selective about who it lends to and what kinds of loans it hands out. That can't be good news for middle class high school seniors.

Mark Kantrowitz is the president of the financial aid Web site FinAid.org.


Vigeland: Mark, why the cutbacks at Sallie Mae?

Mark Kantrowitz: There are 2 main reasons. The subprime credit crisis has lead to higher costs for these lenders and also made it more difficult for them to get funding to issue loans. Congress has also passed legislation that's cut the profits from the other end, so they are seeing their profit margin squeezed significantly.

Vigeland: So what does this mean for students who are hoping to take out a loan and go to college? Is it really going to get that much tougher?

Kantrowitz: It'll get a little bit more difficult. For consolidation loans, I expect minimum balances to increase from the current low of $5,000 to about $10,000. Private student loans are going to become more selective as lenders tighten their credit underwriting criteria.

Vigeland: Now, what does that mean? Does that mean, for example, that as a student or a parent, you will have to have a higher credit score?

Kantrowitz: A slightly higher credit score. Previously, you could have a credit score as low as 620. Now you have to have 650. They're also going to require more cosigning of loans, so if you're a student who doesn't have much of a credit history on their own, you might find that your parents have to cosign the loans. Federal loans don't require any kind of a cosigner.

Vigeland: So, what does this mean, in general, for a middle class student who's counting on being able to get loans to pay for college?

Kantrowitz: They'll find it a little bit more difficult to get private student loans, but they'll still be able to get federal student loans. Overall, slight increase in cost, slight decrease in loan discounts, but generally speaking, the non-profit lenders, which are state agencies, offer the lowest loan discounts. If you want to reduce the cost of your loans, look to the non-profit state loan agencies as the source of low-cost loans.

Vigeland: Don't we also try to encourage students to do whatever they can to avoid the loans in the first place?

Kantrowitz: Absolutely. If you have to have debt, focus first on the federal loans before resorting to private student loans because the federal loans are cheaper and have better terms. Students need to live like students while they're in school so they don't have to live like students after the graduate.

Vigeland: Mark Kantrowitz is with FinAid.org. Thanks for coming in.

Kantrowitz: Thank you for having me.

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