Danger Lurks When Shopping for Student Loans

[flashl]

NY Times

By RON LIEBER
Published: July 26, 2008

When college financial aid officers got into trouble last year for accepting gifts from lenders, the moral of the story was clear: You could easily overpay for your student loan by simply borrowing from a college’s recommended lender without first shopping around.

There is just one problem with comparison shopping for a private student loan. Doing so may damage your credit score. Since lenders quote higher interest rates to applicants with lower scores, some students could end up paying thousands of dollars more in interest over the life of their loans.

In few other areas of consumer life are you at risk of being penalized for seeking out the best deal. Indeed, mortgage and auto loan seekers who comparison shop within a relatively short period of time do not see their credit scores suffer. But Fair Isaac, the company that helps credit bureaus calculate credit scores, does not extend the same break to private student loan applicants or their parents, who often co-sign for loans.

The basic inequity here — the fact that people borrowing money for higher education are not given the same benefit of the doubt as people shopping for mansions and BMWs — is unfortunate enough. But the real head-scratcher is how little anyone in the industry seems to know about how often students and their parents suffer damage. Fair Isaac thinks it’s rare, if it happens at all. Lenders and student loan brokers think it’s common.

There you have it, the economy and most financial rating agencies are fubar, Fannies' and Freddies' ratings are in the tank, BUT if YOU want good credit?? or consideration from lenders, YOU must mind your FICO scores!

[Orrex]

1. Student loans are every bit as toxic to the economy as the mortgage crisis

The primary difference, as far as I can tell, is that you're inescapably bound into paying your student loans, no matter how badly they screw you, no matter how many fines they tack on, and no matter how little your college education turns out to have been worth, after all. Barring death, disability, or incredible financial hardship, you can expect Sallie Mae and her goons to hunt you well into your dotage.

[flashl]

2. You got that right. Never understood the lack of outrage about scandals last year.

Student Loan Overhaul Advances

Washington Post

Democrats in Congress are pushing to overhaul the nation's student loan system with legislation that would cut federal subsidies to lending companies by as much as $19 billion, channel most of those savings to student aid and ease repayment rules for borrowers.

The Senate education committee overwhelmingly approved its version of the legislation yesterday, one week after the House education panel took similar action. Senior Democrats predicted that the bills would come to a vote by the end of next month and would be reconciled without significant difficulty.

Momentum for the legislation has grown this year as the $85 billion-a-year industry has come under intense scrutiny. Federal and state investigations have found conflicts of interest among lenders, universities and government regulators. In addition, the Democratic takeover of Congress this year has allowed the party to drive its agenda on student loans for the first time in more than a decade.

"This legislation will help reverse the crisis in college affordability," said Sen. Edward M. Kennedy (D-Mass.), chairman of the education committee. "It will restore balance to our broken student loan system by reducing unnecessary lender subsidies."

[Orrex]

3. It would be nice if,

Instead of giving half a trillion dollars to Halliburton, Blackwater, et al, our friends in Congress could pass some kind of student loan bailout. Bush and the Democrats spent weeks having very public orgasms over their miniscule tax "rebates" that for many people would barely pay for a month's worth of heating bills. Imagine the impact to the economy if a freeze were placed on penalties for defaulted student loans, and the first $20,000 of every student loan was just wiped out. It would utterly transform much of the middle and lower classes with the stroke of a pen.

[grasswire]

4. wow...

...and that money would stimulate the economy!

Maybe you ought to write an OP to this effect.

[northernlights]

5. Since I'm going to probably be looking for a private student loan

next year, to supplement my stafford loans when my savings runs out, this concerns me.

How does 'comparison shopping' influence your credit rating?

I have an excellent credit rating -- 1 mortgage paid off completely without any late payments, and a couple credit cards all kept up to date, no outstanding debt at all.

How would getting comparisons of various student loan rates, without actually applying for any of them, effect a credit score?

Or is there a different meaning to the phrase "comparison shopping" than I understand? To me, comparison shopping is you inquire about the terms and rates of different loans.

I can understand some of the issues with student loans since, unlike mortgages and auto loans, they are unsecured.

[flashl]

6. Maybe this will help ...

How did it come to pass that 18-year-olds were vulnerable to paying more because they shopped around? To answer that question, and develop strategies for credit score damage control, you need to know a bit more about the worlds of student debt and credit score algorithms.

Borrowers took out $17.1 billion in private sector loans in the 2006-7 school year, according to preliminary College Board figures. Part of what makes private loans different from other student loans is that rates can range wildly, by several percentage points, even with one lender.

To quote a rate, lenders check an applicant’s credit history. And every time a shopper asks a lender for a rate quote, it can show up as another inquiry on a credit report.

Lots of inquiries send the wrong signals to the formulas that create the popular FICO credit score that Fair Isaac administers, namely that borrowers may be applying for multiple loans because they’re financially troubled and potentially going bankrupt.