The credit crunch has already taken a bite out of Wall Street, but now it's baring its ugly fangs at loans for college, homes and small businesses. "Good Morning America" financial contributor Mellody Hobson sheds some light on where tight credit is hitting home and what you can do about it.
Let's start with small business owners: Is it harder for them to borrow money now?
The same ills to hit the college lending market have struck entrepreneurs in need of business loans. A recent survey by the Federal Reserve reported that more than 50 percent of banks have tightened their lending standards. It is even tougher for aspiring or small business owners who historically have relied on their biggest asset — their home — as a means to secure a loan. As home prices have declined and lenders have become more skittish about the housing market, this source of collateral has become even tougher to rely on.
The good news — fewer people are thinking about starting up a small business, which means you may actually be better off if you are in need of financing. According to the Small Business Administration, the number of small business loans are down 19 percent from a year ago, so do not assume it's impossible to secure funding. In fact, now may actually be a good time to try and get your business off the ground because fewer people are competing for the loans.
What about homeowners? Are there any silver linings in the mortgage market for them?
While lending standards have become much more stringent, there is some good news to report. First, following the latest round of rate cuts from the Federal Reserve, there has been some downward movement in mortgage rates. Additionally, Fannie Mae is planning to introduce a program later this year that would allow "underwater" homeowners — those who owe more than their home is worth — to refinance up to 120 percent of the property value. Fannie Mae estimates that about 150,000 households would qualify for this refinancing program.
Also, it is important to keep in mind that interest rates are still hovering around historic lows. The rate on a 30-year-fixed mortgage is about 6 percent, as opposed to 10.5 percent 20 years ago. These low rates, coupled with declining home prices, are a real plus for homebuyers.
With so many high school seniors getting ready to head off to college this fall, you say they are facing a tough time securing school loans?
There is no question it has gotten much harder for students to get a loan for college. Historically, there are two ways for a student to take out a loan — either through a private lender or through the federal government, and the typical student relies on a combination of both. Students borrowed more than $77 billion to pay for higher education last year, with almost 25 percent of those loans coming from private or state programs — which are the very lenders who are tightening their purse strings and making it really difficult to take out a loan. Not only are many lenders disappearing from the marketplace all together, but most of them are setting the bar much higher — making it difficult for cash-strapped students and their families to qualify.
What about for parents of students? You also say they are finding it harder to get loans for their child's education, as well?
Yes, it is getting harder for parents to help. The most common student loan for a parent is called a PLUS loan. Think of the PLUS loan like a bridge — it covers the gap between what a student is able to receive in federal and private loans and the actual cost of their tuition. For example, if a student receives $3,500 in loans and tuition is $9,000, a parent can take out a PLUS loan for the balance of $5,500. The problem is that parents are finding it harder and harder to qualify for a Plus loan. Any blemish on your credit history — especially a bankruptcy or foreclosure filing, can disqualify a parent.
You do have some good news for us on the student loan front, though. Tell us more.
Yes, Congress and the president recently signed into law the Ensuring Continued Access to Student Loans Act of 2008, which does several things to make sure students are not left out in the cold by the credit crunch. Among the most important changes, the Act increases the total amount of money a student can borrow through Stafford loans from $23,000 to $31,000 for dependent students and from $46,000 to $57,500 for independent undergrads. It also helps parents in two ways — first, by giving them the option to defer PLUS loan repayment for up to six months after the student graduates; and second, by allowing those parents who are struggling with mortgage delinquencies of up to 180 days to still qualify for PLUS loans. Additionally, the Act enables the U.S. Department of Education to pump liquidity back into the student loan market, which would help ensure that the well does not dry up for this kind of loan.
You also have some advice for graduates that can save them some money later this summer. What is that?
Absolutely. First, for students who are nearing graduation and who have federal or Stafford loans, they may be able to benefit from the biggest interest rate drop in the history of the program. As of July 1, graduates can lock in a rate of 3.9 percent — more than three points below the existing rate of 7.2 percent. This is real money. The average student graduates with about $19,000 in student loan debt, so a rate change of 3 percent adds up to a savings of more than $450 a year on a 25-year loan.
It may sound obvious, but students should not overlook scholarships for college. There are literally millions of different scholarships available for students of all different backgrounds and interests. One of my favorite Web sites to search the universe of scholarships, for free, is www.finaid.org. FinAid's database includes 1.5 million scholarships worth more than $3.4 billion.