Recession raises concerns over availability of student loans

Students' ability to take out loans may be jeopardy due to the current US economic credit crunch. A credit crunch is usually considered to be an extension of recession. It is an economic condition where it is difficult for companies to borrow, as banks and investors become wary of lending, their fear of bankruptcies or defaults driving them. This results in higher rates, causing the price of debt to rise. During a credit crunch some borrowers cannot obtain loans at all.

According to Mohamed El-Erian, co-chief executive and investment officer of Pimco, a credit crunch is marked by an economic recession and a "declining availability of credit, a negative wealth effect triggered by declining house values and a lower standard of living as the result of higher energy and food prices and a depreciating dollar. Job losses will be accentuated by the pressures on consumers, leading to income decline and a further loss of confidence."

In a series of recent live appearances on CNBC's Squawk Box, Warren Buffett, a very successful businessman stated that, "We are in a recession, unless you want to stick strictly to the technical definition, which I really don't think has much meaning to the fellow who has lost his job or is facing a money-market fund that isn't paying out, or whatever it might be."

Or perhaps those seeking student loans? He also said, "This not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think. this will not be short and shallow."

Pauline Vu, a staff writer for Stateline.org wrote in an article, "state officials are worried about what will happen this summer when a surge of students begins applying for fall semester money. some experts say that escalating loan costs could discourage some students from applying at all."

The number of banks, state agencies and private lenders closing down their student loan programs is building. Students could find new lenders, however they run the risk of higher interest rates and fewer benefits with the credit crunch upon us.

State loan programs run by nonprofit lending groups or state agencies have been known for offering loans with better benefits than lenders for profit, but some have stopped offering federal loans. Federal loans are a major source of college money to thousands. In Massachusetts about 15,000 students that previously qualified for the low-interest Stafford Plus loans from Massachusetts Education Finance Authority (MEFA) will not be receiving money as of July 1 as a result of MEFA's forced suspension of the loan program.

"People should not be worried about their ability to get a loan to pay for college. They should be aware that the lender they used last year might not be making loans this coming year, so they may need to choose a new lender. but they are not going to see the rug pulled out from under them," Robert Shireman, executive director of the Project on Student Debt, a group that advocates affordable loans, said.

Lenders generally borrow money in order to lend it out; however, with the credit crunch lenders have not been borrowing as much money. Also, part of the problem has been mortgage payments. Homeowners have been missing payments causing lenders billions of dollars in losses. In return, lenders are fearful to lend much out.

"In this credit crunch, companies still aren't lending," said Stephen Cooke, director of credit research at SMH Capital Advisors, Inc. "It will take a while for credit to loosen up and for low rates to flow through and help the economy."

"Even if some lenders continue to drop out of the federal program, the impact on individual students is likely to be minimal," said Lauren Asher, Vice President of the Project on Student Debt.

"A large majority of loans are made through a small proportion of private lenders," Asher said "Movement further down the list is not going to affect a large number of borrowers.

"Students should not be panicked about being able to get their federal student loans. That's the bottom line," she added.