Banks and other private lenders are saying “no mas” to student loans, making the federal government the de facto college loan lender in the U.S. Why are private lenders taking a hike, and what does that mean to student loan borrowers?
No doubt, there is a seismic shift occurring in the college loan market. According to the College Board, private lender college loans fell by a whopping 52% during the 2008-2009 school year. The College Board also says that U.S. families took out $11 billion in private school loans last year — down from $22.8 billion in 2007-2008.
Correspondingly, federally-sponsored student loans rose 15% in 2008-2009, to $84 billion.
Part of the reason that private lenders are bowing out of the student loan market is the tough credit environment. With loads of toxic debt on bank balance sheets, fewer lenders want to take on any more risk, especially in the form of consumer loans.
Also, state funding for college financial aid has taken a pounding in the Great Recession. The College Board says that state appropriations for public college funding has slipped by 5% in 2008-2009 from the year before, and that number is expected to rise. That has led colleges to hike tuition rates to make up the difference — making the college funding hill even higher and harder to climb.
Another reason is that the federal government is swinging a sharp elbow in the direction of private lenders. The Obama administration has poured billions into federal student loans, and has taken steps to simplify the financial aid process — a big priority for families of college-age kids. As the government takes a bigger role in college lending, more and more private lenders are expected to leave the market altogether.