How a Recession Can Affect Your Private Student Loan Application

Your private student loan application will need to cater to the events and circumstances of the current economy. When the global market is experiencing a recession, your student application is not immune from this trend. The best applications will be those that address the needs and unique circumstances a recession creates for the credit market.

Low Amount of Loans

Lenders across the country start reducing the number of loans they extend during a recession. This is mainly the result of the lack of cash they have on hand. As businesses and personal borrowers default on existing loans, the lenders do not have the finances to provide to new borrowers. As a consequence, the many student loan applications will be compared for a relatively low amount of loans. This means every detail of the application will be reviewed closely. Less than satisfactory applications will be dismissed. 

High Amount of Applicants

While there are less loans to give out, there are even more applicants during a recession. Graduate schools see large class sizes when the economy is slow because professionals are leaving the work force in high numbers due to lay-offs. Many of these professionals will then go back to school as they await economic recovery. Graduate student loans in particularly become a desirable commodity. Understanding this fact, student loan applicants should give lenders a reason to consider them above other applicants. Guarantee of a job or salary after graduation may be a good reason for a lender to favor one applicant.

Low Appetite for Risk

Risky loans are given out in high numbers in an economic boom. For example, loans below the national interest rate, called sub-prime, are distributed more frequently when the economy is growing. When the economy is at a standstill, risk becomes less rewarding for many lenders. They have seen a high amount of default from the risky lenders they approved in previous years. They will start pulling back from risky loans and look for safer, guaranteed sources of revenue. Applicants may consider providing collateral or using a cosigner. If an applicant can get a guarantee through a federal student loan program, he or she will have a higher chance at successfully receiving a loan.

Government Incentive Programs

The federal government may provide incentives for students to go back to school in a recession and for more lenders to provide loans in a recession. Student incentives include an increase in federal funding, a greater tax credit or even loan forgiveness for a number of existing federal debtors. The federal government may additionally encourage private lenders by reducing the national prime interest rate or lowering the qualifications for a federal guarantee. A federal guarantee on a student loan means the private lender can go to the federal government for reimbursement if the initial borrower fails to repay the loan. Both borrowers and lenders have to meet requirements to receive these guarantees, but they can make loans cheaper and easier for both parties involved.


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