Student Loan Inquiries and Your FICO Score

Applying for a student loan? Shop til you drop.

FICO credit scores do not penalize you for shopping for the best student loan deals. When you apply, the lender pulls your credit report and leaves behind a credit inquiry. In some cases the inquiry can lower your scores. However, student loan inquiries from multiple lenders are assumed to be "rate shopping" rather than multiple debts. This logic also applies for auto loan and mortgage inquiries, which are also likely the result of rate shopping. So, be sure to do your rate shopping to find the best deal...your FICO score will be just fine.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

House Passes Bill to End Private Student Loans

The House of Representatives has passed a bill that would effectively remove private lenders from the student loan industry and would instead turn this enormous task over to the Department of Education.

The vote was 253-171, largely along party lines. Republicans had fought the measure, saying it would rob students and schools of choice and lead to job losses (private lenders would still be needed in some capacity to service loans).

The Senate already has begun work on similar legislation. Democrats may need to gain the support of at least one Republican to avoid a filibuster threat, but the GOP already is drawing comparisons to the healthcare debate by describing the bill as another government takeover. 

Private lenders currently make about 75 percent of student loans, which is a growing industry. Because of rising tuition costs and lower contributions from cash-strapped families, total loan volume was $74 billion during the 2008-09 school year, up 13 percent from the year before.

The Federal Family Education Loan Program (FFELP) is the single largest source of college loans. These are issued by private lenders but backed by the government, which also pays the interest while a student is in school or in deferment. The legislation effectively cuts out the private lenders as middlemen.

"The choice before us is clear: We can either keep sending these subsidies to banks or we can start sending them directly to students," said Rep. George Miller, the California Democrat who sponsored the bill as chairman of the House Education and Labor Committee.

How much would an all-government student-loan system save? As The National Journal's Eliza Krigman notes here, the Congressional Budget Office initially said savings would amount to $87 billion over 10 years, allowing more money to go to Pell grants for low-income students, as well as early-learning programs, school renovations, and historically black colleges. But a follow-up examination by the CBO found that once likely defaults are taken into account, savings would be more like $47 billion.

Landon Hall – A freelance writer in Silicon Valley, Landon was a reporter, sports writer and editor at The Associated Press in Portland and New York City from 1997-2006.

Students Not Taking Advantage of Available Loans?

As a sophomore at Calvin College in Grand Rapids, Michigan, Hope Start is quite resourceful at finding financial aid for college. This year alone, she took two jobs, applied for loans, found grants, and won scholarships to help pay her $32,000 in college costs this year.

But unlike during her freshman year, Start didn’t bother applying for a bank loan. “I didn't even try because I assumed it was going to be really hard to get one,” she told the Grand Rapids Press.  

A Reasonable Assumption...Which Happens to Be False

Given all of the horror stories in the media recently about banks responding to the credit crisis by cutting student loans, Start’s decision isn’t surprising. But that doesn’t mean it’s correct. Despite difficulties in the housing and credit markets, student loans have largely stabilized – with the help of the federal government. A law passed in 2007, before the credit crunch, authorized $20 billion in new college aid, including measures cutting interest rates on subsidized Stafford loans by up to half.
   
Many students who qualify for cheaper federal loans apply instead for most costly private bank loans. Sometimes this is because federal loans require them to complete the Free Application for Federal Student Aid, or FAFSA, which can be complicated. The Obama administration is pushing for a bill that would simplify the application.
   
On the private side, many banks have tightened lending requirements, making it harder to get a loan. But banks still receive government subsidies for Federal Family Education Loans, which are also government-insured. This double-dipping has raised protests in some quarters, and may end. But in the meantime, it offers students double insurance that banks will continue lending.

Tips:

• Don’t assume. We’re still in a recession, but banks and the federal government still lends students billions of dollars every year.


• Go public. Private loans cost more in up-front signing fees and long-term interest rates. The FAFSA process may require a few additional hours to complete than a standard loan application, but getting a government loan will save you years of working off additional loan debt.


• Find alternatives. As some banks have restricted student loans, many credit unions have started lending to students for the first time. Many universities have boosted their financial aid budgets to help students through tough times.

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