Effects of College Loan Crisis Uncertain

    Sallie Mae, the nation’s largest student loan company,
    announced last week that its government-funded student loan program will soon
    suffer a financial shortage as a consequence of increased borrowing costs and a
    new law that reduces the amount of government subsidies for guaranteed student
    loans.

    Currently, student loan interest rates are capped at 6.8
    percent, creating a loss in profit for each federal loan Sallie Mae issues.
    Formally known as SLM Corp., Sallie Mae reported a loss of $103.8 million in
    the first quarter of 2008, in comparison with a profit of $116.2 million last
    year.

    There are two types of student loans: those secured by the
    federal government through lending companies and the U.S. Department of
    Education, and those within privately funded programs. The economic crisis is
    most damaging to the latter of the two, according to Executive Director of America’s
    Student Loan Providers Kevin Bruns.

    Student loan companies receive their finances for loans from
    an investment source and in turn are able to lend out these loans at a higher
    cost, and the difference between the two is where lenders like Sallie Mae
    generate their profit. However, the recent credit crisis that has proliferated
    through the U.S.
    economy has jeopardized the various funds that lenders need in order to provide
    student loans. Sallie Mae and other companies were able to absorb the fees
    charged by their sources and issue loans at discount rates, but now
    affordability is in remission and the difference in the loans shows up in
    tuition as a statutory fee.

    “The amount of money it costs to make the loans will be
    higher because the lenders aren’t making the same level of profit [compared to]
    past years,” Coordinator of Student Financial Support for the UC Office of the
    President Nancy Coolidge said. “Since the government has reduced — not
    eliminated — the amount of subsidies provided, the students will pick up some
    of the difference.”

    Despite this turn of events — which is making college
    students across the country anxious about financing their education —
    university officials say UCSD students’ primary source of aid, federal loans,
    will remain relatively untouched. Coolidge said the effects of the increase in
    private loans will most likely surface as a 1-percent origination fee for UC
    students.

    “The lenders are passing along the change, so that’s what
    UCSD students will notice — the fact that their loans will cost more since
    they’ll get fewer discounts from less competition,” she said.

    However, Coolidge said UCSD students should not struggle to
    find government-subsidized loans, since Sallie Mae and other lending companies
    will continue to offer federal loans. The Financial Aid Office also features a
    Preferred Lenders List to assist families in choosing loans.

    Of the $85 billion educational finance market, 61 lending
    companies are no longer participating in federal loans for the 2008-2009
    academic year, and 21 lenders will withdraw from the private student loans
    sector.

    “There need to be proactive solutions rather than the
    current reactive solutions that wait until there is a potentially destructive
    crisis upon us,” publisher of financial aid Web site FinAid.org Mark Kantrowitz
    said. “Congress and the administration are looking into solutions to prevent
    this crisis from occurring, which would ensure no disruption from obtaining
    student loans.”

    Potential solutions circling Capitol Hill include allowing
    lenders to borrow multiple federal loan banks in exchange for a highly rated
    student loan as collateral, or increasing the federal loan limits so that
    students who have been denied a private loan will have the opportunity to
    borrow from federal lenders.

    The College Reduction and Access Act of 2007 cut the amount
    of government subsidies issued to lenders as incentive to provide federal
    student loans, and these finances were reallocated into various financial aids
    such as the increase in the maximum Pell Grant — which will reach $5,400 by
    2012 — but their redistribution has negatively affected the loan market.

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