Will the Bear Stearns Meltdown Wipeout Student Loans?

How has the Bear Stearns Meltdown Affected Student Loans?

Imagine you’re playing poker, you’ve already folded and it’s down to two people. Excitement builds when the tycoon goes All-In with billions. The river card flips and you watch in horror as the tycoon loses everything. You are more than shocked to learn he bet everything he had on a pair of 3’s, and you are disturbed to discover the money wasn’t his to begin with, that it belonged to people who trusted him. You sneak a peek at your next hand, and sure enough, pair of 3’s. How quickly would you fold?

Private lenders watched in horror as Bear Stearns, the 5^th largest investment bank in the US, lost billions of dollars on weak-handed, high-risk subprime mortgages, forcing them to sell the whole kit-and-kaboodle to the competition for an embarrassing two bucks a share. Lenders are treating students from now on like pairs of 3’s, they are folding the hand and will not risk any money unless you are royalty.

There, poker analogies out of the system, we can continue.

From smaller companies like Nelnet Inc. to big fish like Sallie Mae, loans have either been abolished completely or have become extremely difficult for students to get. They are equating students with subprime borrowers and do not want to suffer the same fate as the real estate market. Next fall students and families will discover the criteria for private loan eligibility has become more stringent than ever and prices have increased dramatically.

Where can students go?

What many students could and should do is to follow Northeastern University’s decision to bypass all commercial lenders and get their loans directly from the federal government. Private loans have always out-advertised their federal counterparts, but people will soon discover the many advantages of applying for loans from the latter. First and foremost, federal loans have a fixed interest rate of 6.8%. An incredible fact when you consider the limitless rates imposed by private companies, rates which can often reach credit card heights of 20%. Students presently on federal loans are able to breathe easy during this tumultuous economic crisis as they are not affected by the market the way private loans are. You don’t need an immaculate credit history when applying for your federal loan as there is no credit check, and students in all income brackets are eligible.

For an in depth breakdown of the differences between federal and private loans, please visit http://www.businessweek.com/magazine/content/05_46/b3959126.htm

Will federal loans be available for everyone next fall?

According to the US undersecretary of Education, Sara Martinez Tucker, yes. During a public hearing she announced that the federal loans program has not been affected by the economic crisis surrounding the Bear Stearns meltdown, and that loans will be available for the expected 6.7 million applications in the fall.

A blessing in disguise?

The fact that private lenders like Sallie May are refusing loans to students they deem to be “weak bets” will actually save the students money in the long run. While federal loans might not afford them the Ivy League university of their dreams, students will not be stuck paying ridiculous amounts of interest for the next 30 years. In the end students should have nothing to fear in the wake of the Bear Stearns disaster. Aside from the fact that federal loans are cheaper, available to more people and easier to pay off, they will save students the agonizing experience of dealing with the Sallie May customer service department.