Are Private Student Loans in Jeopardy?

These are “interesting” financial times for students, parents, and universities alike. The makeup of student aid – both student grants and loans – is likely to be changing in the next few years. It remains to be seen how the tough economy will affect private lending in the future.

Starting in the 2012-2013 college year, the United States Department of Education is proposing expanding its Perkins Loan Program from $1 billion to $8.5 billion a year. This will likely have a negative effect on private lending.

With an unsubsidized interest rate of 6.8%, and a volume that’s similar to that of the recent entire private loan volume, these new Perkins Loans could definitely jeopardize the future of private college lending. In fact, the new government loans are meant to protect students who would otherwise need to resort to more expensive private loans or their credit cards to pay their college bills.

Then there are the negative financial issues currently effecting students themselves. Students who are experiencing cutbacks in jobs and having severe issues with mortgages are experiencing more bankruptcies than in the past. Is it possible for students who have declared bankruptcy to be eligible for private loans? This is a somewhat confusing issue.

The first thing a student who has faced bankruptcy needs to do is to make an appointment with the financial aid office at his college or university. The student will also need to contact the lending institution that holds his private loans. This student will need to explain to the lending institution why he is a good risk and explain the reason for the bankruptcy. Lending institutions may be more willing to lend money to students who can secure their loans.

However, some lending institutions have policies that forbid students who have experienced bankruptcy in the past five or ten years, from borrowing from them unless they have a good cosigner.

It should be remembered that, unless parents are cosigning a student’s loan, that parent’s bankruptcy should have no effect on a student’s ability to borrow from private lenders. Also, many lending institutions will lend to students who have been in severe financial straits if their problems were caused by heavy medical bills, natural disasters, or similar circumstances.

So will private lenders still be in the educational lending game a few years down the road? That remains to be seen.

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Are Private Student Loans in Jeopardy?

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