Posted by: Discover Scholars | September 18, 2008

The Credit Crisis

This week, the big news has been the troubles in the financial world. Three of the top five investment banks are now out of business, insurance giants are seeking lifelines from the federal government, and the turmoil seems likely to spread to other sectors of the U.S. economy.  But for people who aren’t employed as Wall Street traders, the more pertinent question is “What effect will all of this have on me?”

A few months ago, we discussed how the troubles in the sub-prime mortgage market would affect students’ ability to get college loans.  This morning, CNN reported that in the last year, 33 lenders have dropped their private loan programs to students.

This tally does not include, however, lenders who have closed their student operations in response to this week’s turmoil.  For example, in perhaps the biggest jolt to students thus far, MyRichUncle.com (whose ads you’ve probably seen on TV), has said suspended its student loan program because they “have no funds to lend.”  To make this even more concrete, CNN.com now has this story about Eric Hahn, a 21 year old student who was forced to cash in his savings and investments to pay for college after his private loan fell through:

Eric Hahn thought his financial situation was set after he was approved for a private student loan with an 8 percent interest rate to supplement his federal education loans. Eric Hahn, 21, estimates he will be in debt for the next five to seven years for his undergraduate tuition.

Just a few weeks later, Hahn, 21, was forced to cash in his savings and investments so he could make his rent and tuition after finding out that the lender, MyRichUncle.com, had suspended its private student loan program.

“Due to continued disruptions in the capital markets, combined with the continued demand we have experienced this year, we are reaching funding capacity limits,” a message on his cell phone said, mimicking a statement on the company’s Web site.

The sudden news left Hahn, a senior-year finance major, scrambling to find additional funding after maxing out his borrowing options from the federal government. Eventually, the country’s leading student loan provider, Sallie Mae, approved him for a private loan at 12 percent.

After he graduates, Hahn estimates it will take him anywhere from five to seven years to repay about $30,000 he will have borrowed by then.

Money isn’t cheap,” said Hahn, who transferred to Georgia State University in Atlanta from the University of Connecticut last year because the tuition was less expensive. “The process is time-consuming, and there’s also the stress of having to liquidate my investments and wonder where I’m going to find money.”

This story illustrates perhaps the most immediate “real-world” effect of the current credit crisis. Students make up a significant segment of the credit market — according to the College Board (via the same CNN report), in 2007, $17 billion was loaned to students by private lending institutions.  However, from a bank’s perspective, loaning to students is risky for the simple reason that they have no immediate income. Not surprisingly, interest rates to students tend to be higher than to “prime” borrowers. And when credit gets tight, access to student educational funding is one of the first forms of lending to be curtailed.

What can we do? At DiscoverScholars.org, we believe that one answer lies in devising alternative methods of student financing. More direct funding of students through organizations like DiscoverScholars.org is one promising solution, because such organizations also provide transparency into how donors’ are positively helping others.

Help us continue to grow:

Students: Apply today!

Donors: Consider making a tax-deductible contribution to the students of your choice.

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Responses

  1. […] Credit Crisis” Yesterday, we talked about some of the real-world effects of the credit crisis. For our readers who would like more background about this week’s past events in the […]

  2. […] changing their career on account of outstanding debt is only likely to increase as government and private lenders continue to tighten their borrowing […]


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