Federal Student Loan Landscape During a Recession

Loans are difficult to attain during a recession, and federal student loans are not immune to the credit issues that impair the rest of the country in a time of low liquidity. However, recessions can also prompt the government to offer initiatives to make college more affordable and loans more accessible to students in need. Most federal student loans are given on a need basis, so if a borrower is receiving a large portion of the funds from other sources, this may not be the best option. For those who are "on their own" when it comes to paying for college, there are many options to consider.

FAFSA

The Free Application for Federal Student Aid is used to apply for the majority of federal student loans. This application asks questions about how you intend on paying for college and if you have help from family or other sources. Most federal loans are not credit-based. This means the application will not ask about your financial history or ability to repay the loan.

Stafford Loans

Stafford Loans are extended directly to students based on their need. There are subsidized loans provided at no interest rates to the neediest students. There are also unsubsidized loans that any student is welcome to apply for regardless of help from parents. However, the total amount given to a student will still depend on how much that student truly needs in order to make up the difference between the funds they are receiving and the cost of college. The interest rates are set each year, and they are often lower in times of recession if the national interest rates are low. 

Direct PLUS loans 

PLUS loans are extended to the parents of students directly through the Federal Family Education Loan program. Either parent can apply for this loan. It is extended on a credit-based system. This means the financial stability of the person applying will heavily affect both the ability to get the loan and the interest rate. Parents will pay off these loans rather than the students. If parents have lost their jobs during a down economy, it may be better for a student to file independently for a Stafford Loan than for parents to seek this loan. 

Pell Grants

Federal student grants never need to be repaid which is an attractive feature in a recessed job market. They are issued on a need-based system to those students who would not otherwise receive the opportunity at a post-secondary education. A formula is used to estimate this need. The most important factor is the Expected Family Contribution (EFC), which will be zero for many Pell Grant recipients. 

Campus-Based Aid

Many schools are forced to cut campus aid programs during recessions. University endowments are typically heavily-invested in the stock market. When the market drops, the amount of financing available to students does as well. It is often better to seek federal aid instead of campus aid during these times. However, many schools have work-study programs to assist students in paying for housing and books while on campus. 

 


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