Finding student loans for junior colleges is not as easy as it sounds. High student default rates and lack of federal loan program participation make financing an associate degree difficult for some students. Would you know how to find suitable loan products?
A Problem Long in the Making
Back in 2008, the NY Daily News reported that community college students had a tough time getting banks to write their student loans. In part to blame was a waning economy that has made financial institutions more mindful of the need to preserve assets. Another problem was the high student default rate on these loans. “I have about six lenders that won't do business with us: M&T, HSBC, Citibank, Citizens Bank, Chase and Student Loan XPress," stated Dutchess Community College’s director of financial aid.
If 2010 Campaign for College Opportunity research on the topic is any indication, of 250,000 enthusiastic California community college students, less than 30 percent completed their two-year course of study. With this high drop-out rate comes the potential for a 70 percent student loan default problem. Although these results only address the drop-out rate in California, there is a good chance that the findings apply to other states as well.
Federal Loans: Subsidized and Unsubsidized
Not all community colleges participate in the federal subsidized loan program; those that do require students to fill out the Federal Application for Student Aid (FAFSA). These loans require the student to show a financial need for the subsidized assistance. In addition, the learner must be at least a part-time student at the junior college and have a passing grade point average. There is no need requirement for unsubsidized loans.
Year 2011 examples of these loans include:
- Federal Perkins Loans that pay up to $5,000 and carry a five percent interest rate; the loan products are need-based.
- Subsidized Stafford Loans are need-based and pay between $3,500 and $8,500; the interest is 4.5 percent.
- Unsubsidized Stafford Loans offer between $5,000 and $20,500 with an interest rate of 6.8 percent
- PLUS Loans for parents enable dependent students to forego the indebtedness, if parents have a good credit history and are willing to take on a 7.9 percent interest loan.
Since two-year colleges get penalized if too many students from their ranks default on loans, individual schools may draft additional rules that further curtail eligibility. A good example of this policy is the Paris Junior College, which denies further access to federal loan products to any student who has an “accumulated outstanding balance of $23,000 either while attending PJC or attending another institution." In short, transfer students or non-traditional students going back to school -- and perhaps still paying on a prior course of study -- will bear the brunt of this limitation.
Private Loans: Creditworthiness a Must
Sallie Mae is a major student loan provider. Community college enrollees looking for help from such private lenders need to be aware of the fine print. For example, the company’s “Smart Option Student Loan," which is marketed as being ideal for “students enrolled in … community colleges," comes with a five percent origination fee.
Even as this loan highlights flexible repayment options, a couple of them come with a higher interest rate. A borrower may overcome a bad credit history with the help of a cosigner, usually a parent, which then puts the cosigner on the hook for repayment -- should the student default at some point. Considering that repayment terms can be as long as 15 months, it may be difficult to find cosigners who are willing to bank on a would-be student’s future solvency and willingness to make wise fiscal decisions.
Other lenders, such as banks and credit unions, set their own standards for making loans. These loan products generally come with the prerequisite credit check but also higher interest rates. In addition, there are few limits on origination fees and ancillary fees.
Beyond the Loans
Grants are another option for the two-year school student in need of ready cash to finance an education. In addition to varying institutional grants, students may benefit from the Federal Supplemental Educational Opportunity Grant (FSEOG) or the Academic Competitiveness Grant (ACG). Other federal grants may also apply, depending on the course of study.
It is clear that student loans for junior colleges are not quite as easy to ferret out as those for a four-year education. Prospective students will be wise to interview the community college of their choice for participation in federal loan programs and also the availability of institutional grants. Schools that do not participate in federal loan programs will require the learner to apply for private loans, which are more expensive than their governmentally underwritten counterparts. Shopping around is a definite must in the education process.