For 24-year-old Tiffany Smith, an Ohio University graduate student, it was easier to obtain a federal loan to pay for school than a private loan because she lacks a credit history.
The New York native's private loan, which her grandmother cosigned, is from JPMorgan Chase for $15,000 to cover living expenses and her federal loan is for $20,000 to cover tuition and general fees for one year.
Students are finding it increasingly difficult to secure loans because of a credit crunch that has reduced the distribution of loans and has increased interest rates, said Jeff Wallace, director of Marketing and Operations at Student Lending Works, a nonprofit student loan lender in Ohio.
Last year, students could obtain loans with a credit score as low as 620, but this year many companies are getting more selective and require at least a 650, said Mark Kantrowitz, publisher of FinAid.org which provides student loan information.
Credit scores range from 350 to 850. A score above 780 is good while below 650 is sub-prime, he said. Smith's credit score was 635, and she needed her grandmother's co-signature to get approval at Chase.
OU doesn't distribute private loans to students without a cosigner, said Sondra Williams, director of Student Financial Aid. Williams added that OU participates in the direct-lending program where the school is the lender and manages the funds provided by the government.
Because private loans are becoming harder to obtain and carry variable interest rates, Congress passed the Ensuring Continued Access to Student Loans Act of 2008, which guarantees federal loans to students and allows lenders to borrow money from the federal government.
I don't see any compelling argument for the government expanding its involvement in the financial loan business
said Richard Vedder, distinguished professor of economics and head of the Center for College Affordability and Productivity. They already have to bail out banks and other financial institutions. There are some limits on what the federal government can do.
Vedder said he is not advocating taking loans from students, but questions why the government would lend money to someone who might not pay it back.
It is encouraging irresponsible behavior and I think college students need to face the real world like anyone else he said. - students can get more of their need covered
Holler said.
Interest rates on federal loans are immune to the economy because they are fixed for the life of the loan and a student can get them regardless of credit history, she said.
Stafford Federal Student Loans currently have a fixed interest rate of 6 percent.-
Wallace said. Know how much you have in debt now
don't wait until graduation day.
' Laura Service contributed to this report.
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