'Crunch' won't hurt loans to students

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I keep hearing about a possible "credit crunch."

Does that mean that it will be more difficult for me to get student loans?

A: Probably not. Some people might find it harder to get a home mortgage, but those in search of student loans - most of which are controlled by the government - shouldn't worry.

A "credit crunch" happens when lenders are tight with their money because they're afraid you won't pay it back. This fear is rising because so many homeowners haven't been making their mortgage payments, which has led to losses at several mortgage lenders and banks.

Some experts anticipate there will be a credit crunch that severely dampens the economy and the way corporate America does business; others say lending standards will just return to normal after being extremely loose in recent years. Either way, it's not going to be quite as easy to buy a home if your credit history is spotty.

The ability to find money to pay for your education, however, probably won't change much, because the student-loan industry is a different animal.

The U.S. government controls how federal student loans - the Perkins, Stafford, and PLUS loan programs - are doled out. Sallie Mae spokeswoman Beth Guerard added that students won't see any change in interest rates on these loans either, because those rates are set by Congress and unaffected by market rate fluctuations.

Federal loans and grants, tax benefits and other federal programs make up 70 percent of the nation's financial aid, according to 2006 data from the College Board.

State grants make up 5 percent, institutional grants account for 18 percent, and 7 percent of aid is from other private sources.

If the credit climate deteriorates, they might feel inclined to jack up rates to make up for rising costs, but it's unlikely they'll turn more people away, said Keefe, Bruyette & Woods analyst Sameer Gokhale.

The main reason is that student-lending standards never got lax in the first place as they did in some types of home lending.

"In the mortgage arena, the deterioration in credit quality had to do with compromising underwriting," Mr. Gokhale said.

"In private student loans ... you had lenders applying pretty tight underwriting standards anyway. There's not much tightening to be done there."

Education lenders are under scrutiny for reasons unrelated to the credit climate. The government has been probing lenders who have provided kickbacks, "revenue sharing" plans and other perks to college administrators, who in return recommend the lenders to students.

Ms. Gokhale said these practices and proposed regulations to prevent them shouldn't affect loan rates or availability.

If anything, some students might find more federal aid than before.

Under legislation passed by the Senate recently, maximum federal grants for low-income students would rise from $4,310 to $5,400 a year by 2011.

This increase won't likely match the rises in college tuitions, however.

Though tuition jumps have been slowing, according to the College Board, the average cost of an undergraduate education, including tuition and fees, at a four-year public university was $5,836 in the 2006-07 academic year.

After adjusting for inflation, that's up 2.4 percent from the previous school year, and up 35 percent from five years ago.


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