SOURCE: NextStudent

September 08, 2008 13:39 ET

1.3 Million More College Students Applying for Federal Financial Aid This Fall as Unemployment Hits Five-Year High

PHOENIX, AZ--(Marketwire - September 8, 2008) - As the economic downturn continues and families face tighter budgets, ongoing troubles in the student loan markets, and a national unemployment rate that just hit its highest level in five years, more students are struggling to pay for their college education.

The Labor Department reported on September 5th, 2008 that the national unemployment rate spiked to 6.1 percent in August -- 9.4 million unemployed Americans -- up from 5.7 percent in July and the highest the unemployment rate has been since September 2003. Employers cut 84,000 jobs last month, bringing the total number of jobs eliminated since January to 605,000.

For months, financial aid experts have warned that the weak economy and rising unemployment, combined with ever-spiraling tuition costs, tanking housing values, and more stringent credit requirements on virtually every source of financing, from home equity loans to credit cards to credit-based private student loans, would lead to more families being unable to afford their college bills. And now, a 17-percent increase in the number of students applying for federal financial aid appears to be bearing out those concerns.

Recently released data from the U.S. Department of Education reveals that the number of students submitting the Free Application for Federal Student Aid (FAFSA) for the current 2008-09 academic year jumped to 9 million from 7.7 million in the 2007-08 academic year.

The Education Department uses the FAFSA to determine a student's eligibility for federal grants and student loans. Students must submit a FAFSA each year -- providing income and asset information -- in order to qualify for federal financial aid such as Pell Grants, Perkins student loans, and Stafford student loans.

"What we are seeing is more people filling out requests for financial aid, and for those who do, more people are qualifying and the aggregate need is increasing," said Richard Toomey, associate vice provost at Santa Clara University.

Squeezed by spiraling unemployment and soaring food and gas prices, families are dealing not just with less available income to put towards college expenses but with the continuing credit crunch that's rendered many other financing options unavailable. Parents who have turned, historically, to home equity loans, credit cards, or college savings plans and investment portfolios now find themselves in a depressed housing and stock market, with no equity left in their house to borrow against and with investments that have taken a nosedive in value.

Even those parents who have enough value left in their house to draw upon face an uphill battle to qualify for a home equity loan. Lenders, still reeling in the aftershocks of the subprime mortgage meltdown, have tightened the credit and income requirements required to qualify for home loans. Similar credit tightening has spread throughout the financial sector, including the student loan industry. Lenders of non-federal, credit-based private student loans have raised qualifying credit criteria to the point where only those students with the best credit scores will be eligible; a number of lenders have stopped offering student loans altogether.

The jump in FAFSA applications this fall indicates, to some, that families who before have been able to afford to pay for their children's college tuition without relying on federal college loans or grants may now be turning to the federal government for financial help.

"Students who haven't needed assistance before are coming in," said Toomey. "You had to expect that this was going to happen with all the news of companies laying off thousands of people."

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