Is My Student Loan Affected by the Slow Economy?

A slow economy will affect a student loan whether the loan is directly from a government program, backed by the government or offered privately from commercial lenders. The degree to which a slow economy impacts your student loan will vary with the type of loan you have, action by the government and the severity of the slowdown.

How Student Loans Work

There are three primary types of student loans and they include:

Direct Loans - Direct student loans are programs funded by the government from which, if you qualify, money is sent directly to the financial aid office of your school on your behalf. An example of direct student loans is the Perkins Direct Loan Program.

Government-Back Loans - The largest government loan programs are backed by the government but offered through commercial lending institutions such as banks and credit unions. 

Private Loans - Private loans are typically a last resort for student borrowers as interest rates can be higher because they are market rates and there is no government backing to offset risk.

In each case, student borrowers begin by filling out the FAFSA application form.

Direct Loans

Direct loans are the least-affected type of student loan in a recession because the government controls the amount of funds available and sets the interest rates. However, in a typical economic slowdown, legislators look for budget cuts which can affect the amount of money available for student loans. The opposite is also true. To stimulate economic activity, government programs are at times beefed up and education loans are considered an investment in the economy.

Whether positively or negatively, a slow economy can impact direct loans. 

Government-Backed Loans

Government-backed loans are impacted by a slow economy in two ways. As with the direct loan program, the amount of funds available and the interest rates for fixed-rate loans can be adjust depending on government perceptions of the nation’s needs.

Some government-backed loan programs do not have fixed interest rates and are offered through private lenders. To the extent that a slowing economy impacts interest rates in your area, this will affect your student loan.

Private Loans

A private student loans is most impacted by a slow economy. Typically, as an economy slows, interest rates come down. Also, typically, a slowing economy follows a time of loose credit with lenders tightening credit in reaction.

While lower rates may be available to you, student loan can be harder to come by.

Your Credit

Some government student loan programs do not require a credit check of the applicant. Some programs do and all private lenders do. For many people, a slow economy can impact the ability to repay loans, can lead to blemishes on a credit history or can change financial circumstances, making them less desirable loan applicants.

While the borrower can clean up bad credit or address financial circumstances, this typically isn’t done quickly and can impact the ability to get student loans - particularly private student loans - when needed.

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