Remember the (Student) Loan Crisis?

Harry Moroz

Remember the (Student) Loan Crisis?

The economic question of the day – to bailout or not to bailout – extends beyond storied investment banks and outsized government-sponsored enterprises. As credit becomes ever more difficult to obtain, there is concern about lenders’ ability to continue to provide student loans.

Two provisions of the Ensuring Continued Access to Student Loans Act or ECASLA (not ERISA!), passed in April, are designed to forestall a worst-case scenario in which credit becomes so squeezed that lenders stop offering student loans en masse. Both provisions were set to expire in July of 2009, but, in a sign that credit markets are not expected to improve anytime soon, the House and Senate have voted to extend the emergency provisions to July of 2010. The extension awaits the President’s signature.

The first provision eases restrictions on the lender-of-last-resort program that serves as a backstop for students unable to obtain loans from normal lenders.

The second provision permits the Secretary of Education to purchase entire loans or “participating interests” in loans from lenders in the Federal Family Education Loan Program (FFELP) if the Secretary determines that lenders are unable to meet the demand for student loans. The federal government guarantees and subsidizes lenders to issue loans to students via FFELP, while the feds provide loans directly (i.e. without a private lender intermediary) to students through the Direct Loan program. This authority would essentially provide lenders additional capital that they would be obligated by the law to use to originate more student loans.

While lenders have certainly dropped out of the student loan business, there have been no clear-cut (or at least widespread) reports of students and parents having increased difficulty finding lenders, in part because schools are relying more on the Direct Loan program and in part because federally backed loan limits were raised earlier this year (in ECASLA). There was, admittedly, a bit of panic earlier this week when Wachovia limited the amount of funds universities could withdraw from an investment pool that nearly 1,000 schools use to cover operating costs.

Still, the Department of Education has already quietly used its enhanced authority, buying up interests (and perhaps entire loans, according to at least one report) in between $3 billion and $4 billion in loans. And the program is by no means free from criticism. The New America Foundation questions why the extension was needed now, a full year prior to the program’s expiration. Others believe the fees paid by the government to lenders are too high. Still others are concerned about higher interest rates for students:

Barmak Nassirian, the associate executive director at the American Association of Collegiate Registrars and Admissions Officers, said he found the [participating interest] program "disturbing," because it lets lenders borrow from the [Department of Education] and lend the money back to students at much higher rates.

Contraction of the market for student loans is certainly undesirable. But one has to wonder why the Department of Education has been more willing to prop up private lenders than to encourage participation in the Direct Loan program administered entirely by the federal government.

Comments

Student loans are used to pay college tuition, room and board.

College tuition, room and board has increased well above the rate of inflation for thirty years.

Barmak Nassarian works for an organization that represents the people who set these ridiculous prices.

Where does he get off criticizing lenders?

Finally, the government makes money on the liquidity funds it lends to lenders. Why is that a surprize? The government makes money on most of the Direct Loans (the loan program beloved by Nassarina and the New America Foundation) it makes students and parents. Who alows that? Congress. Why? It needs the money.

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I am a college student who is very concerned with the economic crisis and getting student loans.

Not only has it been hard in the past to get loans, but it will get even harder now with the major economic decline. I am very scared that this next loan period I might have to withdraw from school because it will be nearly impossible to receive a student loan.

Is there anyone who can offer good advice as to what I should do? I most certainly know I am not the only American, let alone student, who is feeling this major panic.

Will the $700.00 bailout plan make it easier to get student loans Or will the bailout money be mostly used towards the " mortgage crisis"?

Should I realistically start planning for another job and think about " what ifs" and the possibility of " putting off college" until this crisis is resolved?

This is a scary reality for all college students. Where do we go from here?

Lyndsay

Harry Moroz

Remember the (Student) Loan Crisis?

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