Posted by: Discover Scholars | September 24, 2008

Credit crunch hits Sallie Mae

Last Thursday, we wrote about how the credit crunch has forced many private lenders to cease their student loan operations.  Now, KCBS in San Francisco is reporting that even Sallie Mae, the originator of a majority of federal student loans, has adjusted its standards for awarding government aid.

Their report has some interesting statistics and anecdotes about the market for student loans:

SAN FRANCISCO (KCBS) — The current economic crises in the financial sector may make it harder for college students to get help paying for school.

A huge sea change in the type of federal financial aid that students receive has made it harder to get through higher education, according to Tamara Draut of the non-partisan public policy organization Demos.

“Today, two out of three college students borrow money to help pay for college. That’s up from one out of two in the early 1990s. The other thing that has happened is that students are borrowing a higher amount, and then graduating into the economy, with on average $20,000 in student loan debt,” said Draut.

And now recent economic troubles are making it harder for students to get loans. Sallie Mae, the nation’s leading lender of federal student loans, has tightened its loan criteria, as have private banks that have adversely been affected by the sub-prime mortgage crisis.

College application specialist David Kenney with advises that students thinking about college apply to between six to ten schools, both public and private.

“Once you apply to more schools, and you get accepted to more schools, you get options through the financial aid package that they offer you, and that may save you thousands of dollars, and allow you to not take out private loans,” said Kenney.

Unfortunately, Draut says financial aid for students has not kept pace with the skyrocketing cost of a college education. (our emphasis)

A couple quick points that we’d like to make:

  1. There are real reasons why more students are borrowing to pay for their education. There also are reasons for why education costs have increased faster than awarded aid.
    Our post on Monday explained how one factor contributes to both problems: artificially low interest rates provide a mechanism for colleges to increase their sticker prices as well as the borrowing that students must take on to finance their education.
  2. We find it interesting that advisors like David Kenney are encouraging college applicants to apply to more schools, so that they may compare financial aid packages. This increase in the number of applications represents an additional cost (both in terms of the nominal fee, and students’ time) beyond others we have talked about in previous posts.
    Wouldn’t it be better if students could focus on applying to the schools that best fit them academically and personally, instead of to those with the best aid packages? Doesn’t it make more sense for students to have the same amount of financial assistance regardless of where they enroll?

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  1. […] of students 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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