Non-Credit Based Student Loans
In this era of increased credit importance, why are non-credit based student loans becoming so common? Much of the credit goes to the Federal Government.
One of the major achievements of the administration of President Bush has been a push to counter rising costs of higher education by making student loans more accessible to more people. One of the common ideas of credit is that most lenders lend money to those people who really need the money the least. There is some truth to this as risk of repayment is a major determining factor in loan decisions and in the interest rates and repayment conditions of these loans. So, why are non-credit based student loans becoming so popular?
One of the main reasons is the Federal Student loans programs, such as the Stafford Loan program, that has set the Federal Government up as a friendly co-signer to the borrower. The idea of the Federal Government in this program stems from two facts. The first is that the country needs to have an educated population to compete in the global economy. College and higher education must not be priced out of the reach of our deserving, but lower income children. This is a social issue. The country can not afford to have an undereducated population.
The second concept behind the Federal Government’s backing of student loans is the fact that the Federal Government is actually a very efficient debt collector. It is easier for the Federal Government to track defaulted borrowers and recoup loan amounts by taking income tax refunds or garnishing wages. So, in many ways, the Federal Government is not taking that much risk in backing these loans, and when they do back them, the lenders are not taking as much risk either.
This means that the normal criteria for loan approval have changed. Credit history is no longer as important. In fact, most student loan companies recognize that the majority of applicants will be high school students just graduating and not really having much of a chance to establish any type of credit history.
At the same time, there is some limit to the ability of Federal Student loans to finance the total cost of College and this has led to a booming private student loan industry. Although the private sector does not have the backing of the Federal Government, they must be competitive in the eyes of potential students in order to exist. Non-credit student loans are made simply for the reason that if they were not, high school students would be finding other ways to pay for college. They are not going to normally accept the idea of establishing sufficient credit to qualify for standard loans before going on to College. The non-credit student loan exists for one main reason. It is the recognition that the more students we graduate from our Colleges and Universities, the better off we all will be.
