First, it is important to have a basic understanding of the student loan world. There are two basic types of student loans, government loans and private loans.
Most students who borrow to fund their education start out with a Stafford Loan, which is a government backed loan. The Stafford Loan comes in two versions:
- Subsidized Stafford Loan: This is the version for which all payments (principal and interest) are deferred until you graduate. The government pays the interest for the student.
- Unsubsidized Stafford Loan: If you don't have enough unmet financial need to qualify for a subsidized loan at the maximum for your grade level, you can receive the balance (up to the entire amount for your grade level if you have no unmet financial need) in the unsubsidized Stafford Loan. With the unsubsidized version, interest accrues each year while you are enrolled, and we recommend you pay this interest quarterly.
And then there is also the PLUS Loan: The PLUS Loan is a government backed loan that parents can borrow to help pay for their child’s education.
These loans are very secure, and considered very good investments by lenders, because the Federal government pays the lenders to participate in the programs and guarantees a high percentage of their losses.
There is more than one way to get a Stafford or PLUS Loan:
- Many colleges participate in the program known as the Federal Family Education Loan Program (FFELP) whereby students or parents choose a commercial or non-profit financial institution (such as a bank or credit union) as their lender.
- Colleges can also participate in the William D. Ford Federal Direct Loan Program. For short, we call that Direct Loans. In this program, the Federal government is actually your lender and your college processes your loan directly with the Federal government. No middle man lender or other agency is involved. As many Messiah College students and parents know, Messiah College participated exclusively in the Direct Loan program for twelve years prior to the current 2007-2008 academic year.
Now, at Messiah, both options are available.
Because many students need more money to fund their education than they can get from the government loans, many lenders have added private loan products to their offerings. In many cases, the same lenders are offering government loans and private loans. Private loans typically offer the ability to borrow more money than the government programs, but they are more expensive to the borrower in terms of interest rates and fees, and more risky to the lender because the government is not guaranteeing these loans.
Two things.
First, in November of 2007, the United States Congress passed a law that significantly reduced the payments to FFELP lenders for participation in the Stafford and PLUS Loan programs. Since that time, a number of lenders have decided that the Stafford and PLUS Loan programs are simply not profitable enough for them to continue their participation, and they have announced withdrawal from the programs.
Second, our nation has experienced an economic downturn. Many non-profit lenders raise student loan capital through a thing know as Asset-backed securities (ABS). These are a way for finance companies to "liquefy" their balance sheets by selling future returns on public markets, essentially borrowing against their own assets (i.e. their loan portfolios). Recently, because of the economic situation, many of the auctions at which these securities are sold have failed. In other words, the lenders haven’t been able to borrow more money to make more student loans, and several have left the programs because of this.
Additionally, because of concern over the risks of their student loan portfolios, some private loan lenders have announced that they will no longer make private loans to students at schools that they consider to be high risk.
It would be a mistake to say that there is no reason for concern. As with any situation, unanticipated developments can occur and things can spiral out of control more quickly than anyone anticipates. Witness the recent mortgage ‘meltdown’ as an example. This is why we continue to monitor the situation daily. But, there are some very good reasons why we don’t think this situation should cause any problems for Messiah College students:
- In the FFELP program, we work with several large national bank lenders. Banks typically haven’t been having as much trouble with this situation because they have sufficient loan capital to lend. In fact, some large lenders are taking this opportunity to expand their participation in the programs as smaller lenders drop out.
- In the 1995-96 academic year, Messiah College became a 100% participant in the William D. Ford Federal Direct Loan Program. When we announced that, for the 2007-08 year, we would once again start to process loans in the FFELP, we did not withdraw from Direct Loans. We give you the choice of which program you want to borrow through. This puts Messiah in a very unique position relative to most other colleges in the U.S. Most schools participate in only FFELP or only Direct Loans and would have a difficult time quickly switching to the other program. We can easily go in whatever direction is necessary to get the loan funds that our students need.
- Regarding private loans, while some lenders are pulling back eligibility for students in high risk sectors, Messiah College students are highly valued for their high repayment rates and they are the type of students lenders are seeking out in this environment. In conversations with lender representatives, we have been assured that our students should have very little trouble receiving private loans. Having said that, even under the best circumstances, there are always some students who have difficulty receiving private loans. While we have never been able to guarantee that every student can get a loan, our staff routinely works with students to exhaust all the options and very few students find themselves unable to secure the necessary funding.
Questions should be directed to:
Messiah College Financial Aid Office
One College Ave.
P.O. Box 3006
Grantham, PA 17027
Email: FINAID@MESSIAH.EDU
717-691-6007
