Lenders’ Fears Could Raise Interest on Student Loans

As if rising tuition costs weren’t enough, many college students could soon face higher interest rates on their student loans, another potential aftershock of last week’s U.S. credit downgrade by Standard & Poor’s.

Federal lending such as the popular Stafford loan program will be unaffected because the interest rates are fixed at 3.4 percent. But private loans from banks usually come with variable rates, making them vulnerable to volatility in the stock market and lenders’ fears that, with the economy still in turmoil and jobs in short supply, students will be unable to repay their debts.

Coupled with cuts for education in many state budgets and subsequent increases in tuition by major universities, a 1- or 2-point rise in interest rates could be the final straw for some students, said Mark Kantrowitz, a financial aid specialist and publisher of finaid.org.

"It’s another nail in the coffin," he said.

About 14 percent of the nation’s undergraduates take out private loans, according to the 2007-2008 National Postsecondary Student Aid Study, a survey conducted every four years by the Education Department. Students turn to private lenders if they aren’t eligible for federal grants or loans, which are awarded based on financial need.

Even students who qualify for federal help may be attracted to private loans because, at their lowest interest rates, they may be a better bargain than government lending.

For example, JPMorgan Chase & Co., one of the largest banks in the nation, offers private loans through its ChaseSelect program with a variable interest rate of 3.25 percent to 9.5 percent, but the institution bluntly tells students on its website that “any [interest rate] increase will result in either a higher payment amount or more payments by extending” the term of the loan.

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