It Would Also Improve Access Since Private Student Loans Are Unavailable To Low And Middle Income Families With Bad Credit. É Establish An Undergrad PLUS Loan Similar To …

INTRODUCTION

The subprime mortgage credit crisis, when combined with the lender subsidy cuts from the College Cost Reduction and Access Act of 2007, has presented significant challenges to the nation’s education lenders. These challenges have caused several prominent education lenders to suspend their participation in federal and/or private student loan programs, often with little or no advance notice. Most of the remaining lenders have cut borrower benefits2 on federal education loans and many have increased interest rates and fees on private student loans especially to borrowers with bad or marginal credit. The lenders are also eliminating subprime exposure by establishing more stringent credit underwriting criteria for their private student loan products and by curtailing the marketing and origination of federal student loans at high default rate schools. PLUS loan denial rates are also likely to increase due to an increase in foreclosures and repossessions. There is also the potential for significant short-term disruptions to the federal and private education loan programs when lenders run out of the liquidity needed to make new loans. These challenges will reduce the availability of federal and private education loans somewhat, especially to subprime borrowers, and will increase the cost to all borrowers.

The purpose of this policy paper is to summarize the current problems faced by the student loan industry, evaluate the impact on borrowers and to suggest solutions. The solutions are focused on increasing federal education loan limits, injecting liquidity into the federal education loan system and eliminating the index rate mismatch.

EXECUTIVE SUMMARY

The turmoil in the capital markets is leading to decreases in availability and increases in costs for both federal and private student loans. It is also generating a bit of turbulence as lenders have suspended their participation in federal and private student loan programs. The main actual and potential impacts involve borrower eligibility, lender availability and loan cost.

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