Ryan ChartrandWith the American economy seemingly on the verge of collapse, many students are becoming leery of the unstable job market that awaits them after graduation. But there is a more immediate effect that is worrying others.
Increasing economic troubles are causing students nationwide to borrow more money than ever before. Many private lenders have gone out of business thanks to the high demand and a poor job market that prevents some students from repaying their loans.
“Last year (Cal Poly students) borrowed through 76 different lenders,” Cal Poly’ Director of Financial Aid Lois Kelly said. “Nineteen of those lenders are now declining to make any student loans. That is a substantial number of lenders no longer in the market.”
Kelly stressed that those 19 lenders only made up about 3 million of the school’s $55 million in loan money over the last fiscal year but noted that there are still several lenders checking their options.
“We still have a lot of vendors who are weathering financial issues, trying to make appropriate decisions that will allow them to continue,” Kelly said.
Many students have had to deal with finding a new lender, a task Kelly said is difficult to manage.
“I see the challenge for students right now is finding a lender who can be there for them for the rest of their years as a student,” Kelly added.
One bank that still lends to students is Wells Fargo, though it acknowledges it’s having trouble accommodating both the influx of new applicants and its already high-volume of prior borrowers.
“We’re very active in serving the need for Federal student loans,” said Wells Fargo spokeswoman Julie Campbell. “However because of new laws for federal student lending and because other lenders have left the business or reduced their support for it we have taken steps to ensure we can meet all of our existing customer commitments and achieve the appropriate mix of federal and private student loans.”
Not only are more students borrowing money, but their debt level has risen dramatically.
Over the past decade, debt levels for graduating seniors with student loans has more than doubled from $9,250 to $19,200 an increase of 108 percent which, after inflation, is a 58 percent rise according to projectstudentdebt.org.
Campbell said the bank has tightened its lending practices but will continue to loan to students at schools they feel are less risky. Currently, Cal Poly is one of those schools.
A 2002 U.S. Department of Education study done on student debts ranked Cal Poly students among those most likely to repay their debts after graduation.
Cal Poly had a 1.5 percent default rate, making it the lowest default rate in the California state university system.
“Cal Poly students have an excellent reputation for repaying their loans,” said Cal Poly economics professor Michael Marlow. “Keeping that up is probably the best thing. It sheds a good light on our students.”
Marlow, who worked for five years in the U.S. Treasury Department, thinks that growing interest rates present another problem for students.
“In tough economic times there is a demand for loans by students,” Marlow said. “When economic times are tough, college applications go way up. More demand means probably interest rates will go up.”
While college applications may be on the rise, a survey released Tuesday by the National Association of Independent Colleges and Universities claims that out of 500 colleges surveyed, 45.8 percent have had some students “stopping out of school or switching to part-time status.”
One of the surveyed universities said it lost a large portion of freshman who were unable to secure a private loan or whose parents were either denied a PLUS loan or could not take one.
Kelly said that Cal Poly students aren’t having these issues and continue to borrow at the same rate despite having less lending options.
Marlow said that other factors have also prompted some privately-run lenders to get out of the market, including fluctuating laws that allow lawmakers to rewrite loan contracts.
“When a bank issues a loan and it seems that there is a favorable environment for lawyers and judges to rewrite the terms of the contract later, a lot of bankers are going to be hesitant,” Marlow said. “It will downgrade the value of a loan. (Lenders) are in the type of environment where they will wait and see how it all pans out.”
Marlow was quick to point out that students are not being picked on; tough economic times make it harder for everyone.
“I don’t think students are in any other boat than what anyone else is right now that wants a car loan, student loan or mortgage loan,” Marlow said. “There is no reason to think students are being singled out.”
Kelly said that student borrowing is not the only option since most lenders offer parent-driven loans for their children who are entering university.
She added that if the parents are not eligible due to a precarious financial situation, then that student may be eligible for an extra four to five thousand dollar loan each year.
Parents of students are borrowing more over recent years. In 2004, the parents of 15 percent of graduating seniors took out federal PLUS loans. The average debt for parents of public university students was over $14,000.
An alternative that many students turn to when denied a student loan is credit.
Kelly says this is a dangerous game for students to play.
“Student loans are a much better alternative than falling into credit card debt,” she said. “If a student feels that he and his family are in some financial crisis, the councilors would be more than happy to help find an alternative.”