MICHEL MARTIN, host:
We'll take a look now at the other challenge to education today - paying for it. We knew we needed a money coach for this, so we've called on our personal finance guru, Alvin Hall. Across the country, students are eyeing their mailboxes for college acceptance letters. But after that good news, just how will they pay for the schools of their choice? Last week, several banks pulled out of the Federally Guaranteed Student Loan Program. Other lenders are reducing their participation.
This follows last year's decision by Congress to cut lender's subsidies by more than 20 billion dollars over five years. Here to help us sort all this out and tell us what this means to us as individuals is our money expert, Alvin Hall. Hi, Alvin.
ALVIN HALL: Hello, Michel.
MARTIN: Alvin, three of the biggest lenders - HSBC Bank, M&T Bank, and TCF Financial Corporation decided not to participate in the federal loan program anymore. Why?
HALL: I think because they saw risk associated with the loans equal to the risk associated with the mortgage crisis. Because today most of these loans are repackaged, very similar to the mortgages, and then sold on to lenders, they started to worry that maybe some of these people are the same people who have mortgages, who have over-extended their credit, and therefore will not be able to pay back their loans.
MARTIN: Do you have any idea what impact this has on the available money for student loans?
HALL: So far, it's pretty regional. If your university or lending officer depended on one of these banks for loans, it does have a knock-on effect. But I think a more important affect of it is that reduces the number of lenders and therefore the cost the borrowing, especially if you have to go outside of the federal system, will go up.
MARTIN: Why can they do that? Can they just opt out?
HALL: It's completely their option. It's a business decision. They decided that the business is too risky. They can back out at any time they want to. The government does not demand that they stay there through thick and thin.
MARTIN: What is the government's role then here?
HALL: The government role is really to try to make as many loans available to people as possible. But there are several ways you can do this. You can go to the direct student loan route, which means you borrow directly from the government, which is probably the most efficient way that most people should do it. They should go to the bank that has access to those kind of loans, or some other lender, and borrow directly from one of those.
Then you can do the private route. The private route is where you go to a bank, and a bank makes you the loan themselves, but that is not guaranteed or backed by the federal government in any way whatsoever. And that's often very risky.
MARTIN: Does the - are there income guidelines or income restrictions on who can participate in the federal loan program? I guess what I'm wondering is why wouldn't everybody participate in the direct lending from the federal government. One would assume that the rates would be favorable because there's no profit motive.
HALL: The rates are favorable. Some people don't know about it. Some universities and smaller colleges don't participate in it to the extent that they could. And there are some income ceilings placed on this. Basically, any student that needs money can get a loan from the federal government. And parents, through a separate program, can also borrow money from the fed up to the full amount of the student's need requirements minus aids.
But therein, Michel, lies the little twist. Provided they've had no adverse marks on their credit records, then parents can borrow. These days, with the credit tightening, people need to look at their credit reports before they apply for loans.
MARTIN: Are you concerned that qualified students who have been accepted to the colleges of their choice will not be able to go because they won't have access to the loans?
HALL: As you asked me that question, a knot came into my stomach because I recall when I applied to schools. I was one of those kids out there who needed money, and I look at the programs today, and I think if a kid is really determined and the parents are really determined, they'll find access to that money. But I think there are parents and students out there who don't understand how credit works, who don't have good credit ratings. They will be damaged by this.
MARTIN: Is home equity a big source of college financing? I guess what I'm wondering is is the overall credit crisis likely to affect the student loan market as well?
HALL: Yes, it will drive the costs of borrowing up. People will have a more difficult time tapping into their home equity to pay for schools. It's just going to get tighter for people to get loans, and people need to sit down before they ever look at the packages and start doing some work to see if they need to borrow, what are the greatest sources. There's some great websites out there. But also I know that several of the bigger schools with huge endowments have completely eliminated loans. So I think that if a student is very bright, they're very motivated, they should definitely apply to one of those schools.
But barring that, they should borrow much more judiciously. Try to keep it as low as possible. If they can pay the interest over the time they're in school, or their parents can, that will help save them money. Do whatever you can to keep the costs of your education low. And I tell everybody, maybe you want to start out at a smaller school these days. You may want to go to an expensive school, but if you can't afford it and you don't get a good enough package, go to a school you can afford.
Be brilliant in that small pond and then transfer to the school you want to and get a better package.
MARTIN: So finally, Alvin, give us some take away tips on what students can do to secure their college financing.
HALL: Start by looking at the types of loans you have available. Look at those made directly by the fed that you can borrow, that your parents can borrow. Look at the income ceilings required. Look at the amounts you can borrow. Also, if you're really desperate, look at private loans, although I would not encourage people to do that. Decide how you're going to pay for your day-to-day expenses. Will you get a job while you're in school? Your role, if you really are motivated to get an education, is to figure it out.
MARTIN: Alvin Hall is our financial expert. He joined us from our New York Bureau. We'll have a special Q and A on our website, npr.org/tellmemore, with tips from Alvin talking about the credit crisis and what else you need to know. Alvin, thank you so much.
HALL: You're most welcome.
MARTIN: I'm Michel Martin. You're listening to Tell Me More from NPR News. Transcript provided by NPR, Copyright NPR.
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