Don’t Worry—Student Loans Are Safe

At a time when you may not have peace of mind about much else in the financial world, let’s be clear: Federal student loans are safe. Because of a piece of legislation called ECASLA (the Ensuring Continued Access to Student Loans Act), students and parents will be able to borrow Federal Stafford and PLUS loans for the 2008–2009 and 2009–2010 school years.

What Happened: The Dilemma and the Solution

Now that we’ve cleared that up, let’s take a look at the details. You may be hearing about the “bailout” or “relief” package Congress just passed, and a few months ago, about a crisis in the student loan industry. It is true that a small number of lenders reduced or stopped altogether making federal and/or private student loans. But during all of these events, federal student loans, which are an entitlement program, remained available for students and parents.

Congress shored up the federal student loan industry with the original ECASLA bill in May 2008. This bill was created because some lenders were being squeezed on two fronts over the last year. First, Congress passed legislation that reduced the profitability of federal student loans for lenders participating in the Federal Family Education Loan Program. Second, certain lenders, particularly those that were not part of banks and therefore couldn’t rely on funds from bank deposits, found it difficult to sell their existing loans as asset-backed securities due to the tightened credit market. These lenders typically sell existing loans to raise capital, which then allows them to continue making new loans. When the asset-backed securities market froze up, so did these lenders’ ability to continue lending.

The ECASLA bill Congress passed to address the situation not only increased how much students and families were able to borrow, but for the first time, it also let the federal government buy FFELP loans from lenders in the private sector. This provided a boost to the industry, helping to make sure that lenders could stay afloat in the federal student loan program. As a result, the student loan market is much more stable than it seemed this past spring—and federal student loans are a bright spot in the middle of this worrisome economic time.

Where We Stand Now

ECASLA is already working. It has caused lenders to return to the FFEL program and has been helping students and families to borrow loans during the fall of 2008. In fact, the federal student loan program has lent a record volume of loans to U.S. students this year! Since ECASLA has been deemed effective, Congress voted in September to extend ECASLA for the 2009–2010 year, and President Bush signed the bill. So, federal student loans will certainly be available during this and next school year.

The Impact on Other Sources of College Funding

What about other sources of college funding? It’s true that some other options may be less viable now than they may have been in past years. Some private college loans and home equity loans may be less available because of tightened credit markets and reduced home values. Also, it’s likely that families’ 529 plans may have lost value temporarily because of the stock market dip. These plans will probably rise again at least somewhat over time, but students heading to school in the next year may not have the opportunity to wait it out. They need to figure out how to pay for school right now.

For these families, it’s time to start working on a Plan B. Check out our Back to School on a Budget blog for some practical tips on cutting costs as well as information on federal loan options that can replace private and home equity loans and savings when necessary. Specifically, parents should turn to the Federal PLUS Loan first. PLUS Loans have a fixed 8.5 percent interest rate, and the recent ECASLA legislation relaxed credit standards for families who are experiencing problems paying the mortgage. This legislation also allowed parents to defer repayment of PLUS loans until after the student graduates or drops below half-time enrollment.

The Bottom Line

What does this mean for you? Well, whether you’re a student or a parent, you’ll find that the federal student loan program is stable, advantageous, and designed to provide a low-cost way to finance those college dreams.

Visit ASA's borrower site for more information on financing college and a range of tools to help you make your plans. And let us know—did we answer your questions? What are you concerned about when it comes to paying for college? We want to hear from you!

Posted by Michael Ryan on October 27, 2008 at 12:44 PM EST

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