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College loan path has gotten trickier

The Baltimore Sun

College tuition bills are coming due. And if you haven't secured your financing just yet, be prepared for a bigger challenge than usual.

The lender you were counting on might no longer be making student loans. Or other glitches could pop up.

Edamerica, for instance, says it's behind in loan disbursements to the University of Maryland, Baltimore County. Disbursements were due last week but now may be about a week late. Other schools in the area might also see delays.

Blame the economy and credit crunch, says Edamerica. Plus, with so many lenders bailing out of the student loan market this year, the Tennessee lender's loan volume has jumped 74 percent. "This kind of growth is difficult to finance even in a better economy," says Senior Vice President Elena Lubimtsev in an e-mail.

Relief is on the way.

A new law allows undergraduates to borrow more from the government and makes federal parent loans more flexible. It also allows the Department of Education to buy federal student loans from lenders so they have cash to make more loans. Some of that money is expected to be in lenders' hands in a week, although that's later than lenders wanted.

This is an unusual year for financial aid for lots of reasons. Dozens of lenders have pulled out of the federal loan program because of the credit crunch and cuts in government subsidies. Others lenders toughened their lending criteria for private loans. And home equity - frequently tapped to pay tuition bills - might not be an option if your home's value remained flat or even fell in the past year.

"It's a perfect storm of lot of things in the last year," says Kevin Walker, chief executive of SimpleTuition, a site to comparison-shop for loans.

Schools are trying to adjust. Some have decided to avoid any turmoil with private lenders by switching to the direct loan program, where money comes straight from the government.

For instance, undergraduates at the University of Maryland Eastern Shore received their loans for years through the direct loan program, but private lenders in recent years provided the loans to graduate students and parents. A few parents didn't get their loan disbursement early this year from a lender exiting the business, and the school stepped in to provide the money, says James W. Kellam, director of financial aid.

That incident as well as other lenders leaving the student loan market persuaded the school to get all its loans directly from the government, Kellam says.

Several schools in Maryland say students haven't encountered any loan problems so far. And Stephanie Johnson, director of financial aid and scholarships at UMBC, says the delay by Edamerica shouldn't affect students. "We are keeping tabs on it. We want to make sure our students aren't adversely affected," she says.

If you haven't locked in your financing, don't panic. But don't dawdle, either. Here are steps to take:

* Contact your financial aid office: This will likely be your best source of up-to-date information on which lenders are still making loans. It's hard to keep up.

Texas lender Brazos Higher Education Service Corp., for example, jumped out of the federal loan program in March, jumped back in in May and jumped out again in July.

"This does seem to change weekly, if not daily sometimes," says Richard Heath, director of financial aid at Anne Arundel Community College.

Citibank and Wells Fargo told Anne Arundel Community College in late spring that they would no longer offer federal loans to students there, Heath says. It wasn't a problem with defaults. Anne Arundel students tend to borrow smaller sums and repay quickly, making their loans less profitable for the lenders, Heath says. Since then, the community college added another lender and now has five making loans to its students.

Don't assume your lender last year is still making loans. And if you have lined up a lender, make sure you choose a back-up in case things change.

Schools add that they are willing to work with students who have done their part but for some reason have hit a snag with a lender.

For instance, it's still not too late to apply for federal financial aid. And at Anne Arundel Community College, as long as students show proof that they submitted the financial aid application, they can attend classes next week, Heath says.

* Look to federal loans first: You're better off borrowing from Uncle Sam than taking out a higher-cost, less-flexible private loan. Now undergraduates can borrow an extra $2,000 a year under the federal Stafford program. This additional amount won't be subsidized, so you will have to pay the interest on the money while you're in school.

"It's just enough additional aid to keep students from going to a private loan," says Sarah Bauder, director of financial aid at the University of Maryland, College Park.

The new Stafford loan limits are $5,500 for freshmen, $6,500 for sophomores and $7,500 for juniors and seniors.

Independent undergraduates or those whose parents don't qualify for a federal parent loan have been able to borrow more under the Stafford loan program. With the extra $2,000, the loan limit goes up to $9,500 for freshmen; $10,500 for sophomores; and $12,500 for juniors and seniors.

* Give parent loans another look: If the student aid package doesn't cover the cost of attending school, parents can borrow the shortfall through a Parent Loan for Undergraduate Students. The 8.5 percent fixed-interest rate, or 7.9 percent in the direct lending program, is often lower than what private loans offer.

Many parents haven't liked the loan because they must start repaying almost immediately. That's no longer the case. Parents can defer repayment until six months after graduation, although interest will accrue and be added to the balance.

Parents must pass a credit check to qualify. But Uncle Sam is temporarily cutting parents some slack because many families are struggling with mortgage payments. It used to be that you wouldn't qualify for a PLUS loan if you were delinquent 90 days or more on any debt. Now, you might still get a loan if you are no more than 180 days late on a mortgage or medical bills as of January 2007. This leniency continues through 2009.

* Private loans, a last resort: Between 5 percent and 10 percent of students take out private loans, with many of them attending for-profit trade schools, according to the Project on Student Debt.

This is where you are most likely to have difficulty because lenders have adopted stricter lending criteria. So if you have a thin or poor credit record, you likely won't get a private loan without a co-signer.

To suggest a topic, contact Eileen Ambrose at 410-332-6984 or at eileen.ambrose@baltsun.com.

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