Credit woes hit student loans
It's getting more expensive for student loan lenders to finance student loans. And that cost may be passed along to you.
NEW YORK (CNNMoney.com) -- The credit crunch may be bleeding into the student loan industry. Here's what it could mean to your wallet and how to protect yourself.
1. Know the process
Student loans are sold to investors the same way mortgages are sold to investors - bundled together in a process called securitization. And with a rising number of defaults and foreclosures in the mortgage industry, investors are increasingly wary of buying these types of loans.
So, lenders need to increase the amount they pay in order for investors to be interested. Bottom line: It's getting more expensive for student loan lenders to finance student loans. And that cost may be passed along to you.
2. Watch for changes
You may need to have a higher balance in order to qualify for a consolidation loan. This type of loan lets you combine all your student loans into one fixed-interest rate loan.
Lenders may start to require balances of $10,000, instead of $5,000 according to Mark Kantrowitz of Finaid.org. That's because consolidation loans aren't very profitable to lenders. It's likely that lenders will even stop advertising these kinds of programs.
In addition, loan discounts could be cut up to 50 percent. This means if you had a 1 percent interest rate reduction for making on-time payments, you may only only get half a percentage point.
You may see fee increases on both federal and private loans. Interest rates on private student loans could increase up to 1 percent.
And finally, lenders are tightening up their standards, so people with credit scores below 650 may have a harder time securing a private loan according to Kantrowitz. In the past, if you had 630 or even 620, you could get a private student loan.
3. Minimize the impact
First, if you qualify for a Federal loan, like a Stafford or a PLUS loan, you can't be turned away, no matter how low your credit score is. And if the interest rates do increase on federal loan, the changes won't be that dramatic, since the rates are set by the government.
So always exhaust the federal student loan money first, before you go looking into private student loans. In private student loans, the lender decides the rate and you'll likely pay more fees and interest.
If your credit is not good, you may consider getting a co-signer on a student loan. You'll be more likely to get a loan with lower fees and interest rate. Banks feel safer if there's a co-signer. Keep in mind the co-signer is responsible for the debt if the primary borrower can't make payments.
If you don't have a credit history, you may want to check out Myrichuncle.com. This lender has a system that looks at your academic and work history, your GPA and your school in order to extend credit. And of course, it's crucial to keep track of your credit score now.