How a Recovering Economy Affects Federal Student Lending

Federal student lending is not immune to the affects of a credit crisis. When an economy is in recession, one of the biggest challenges facing businesses, individuals and students is an inability to gain access to financing. Banks do not have a lot of cash to hand out since many loans go into default when individuals foreclose on homes or businesses cannot repay debts. Ultimately, student borrowers will have fewer options to turn to for the loans they need, and this can place a tremendous burden on the Department of Education loans.

Private Loan Guarantees

One way the federal government helps get students loans for school is to guarantee private debts. Basically, a student will first obtain a loan from a private lender. Then, the lender will submit forms to the federal government to essentially insure the loan. If this occurs, the student borrower can get access to lower interest rates and better deals on the financing. The government will not be able to guarantee as many loans or may even raise the standard for these guarantees in a bad economy.

Limits on Grants and Scholarships

Grants and scholarship programs start each year with a certain number of dollars allocated toward their budget. For example, the Pell Grant program assists about 7 million students in paying for college, but then the fund will dry up until it receives a fresh amount of cash for the next year. In an economic recession, more people will qualify for this need-based grant, and more people will apply. The grants become far more competitive. Students need to submit their applications early, and many students will be turned down because the funds are no longer available. This same thing applies to scholarships from state and local governments.

Expansion of Income Limits

In order to help counteract the affects of the slow economy, the federal government may try to increase the ability for some students to gain access to loans. For example, with the Pell Grant scenario described above, the income of the student or parent seeking the grant will determine if the individual qualifies for the funds. Following the 2007 recession, the income limit was changed so more students could use this option to reduce the total amount of loans they would need to finance through other options. The definition of need was expanded on this and other programs because more Americans were struggling to afford education costs despite not previously meeting the definition of disadvantaged.

Increase in Loan Limits

All federal loan programs have a limit to how much financing a student can receive in a given term or semester. This limit may go up in a recession. For example, the Stafford loan limits on subsidized loans were increased in response to the 2007 recession. This allows students to take less loans from private lenders. It is particularly helpful to get more financing from the government in a recession because private lenders are less likely to extend loans when the credit market is tight.

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