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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Posted by: satria | October 9, 2008 03:06 PM

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

Posted by: Lyndsay | October 12, 2008 08:36 PM

i have read about student loan crises. it really is very much informative. and gives a lot of information that are unknown to any reader.

Posted by: dmiblog.com | November 28, 2008 08:59 AM

By consolidating our federal student loans with Graduate School Loans, we can also lower our monthly payment, which can save us hundreds of dollars each month. In addition, consolidating our graduate school loans allows us to include our undergraduate loans or previously consolidated loans, permitting us to make one low monthly payment.

Posted by: dmiblog.com | December 2, 2008 10:20 AM

By consolidating your federal student loans with Graduate School Loans, you can also lower your monthly payment, which can help save you hundreds of dollars each month. In addition, consolidating your graduate school loans can also allow you to include your undergraduate loans or previously consolidated loans, permitting you to make one low monthly payment

Posted by: dmiblog.com | December 2, 2008 10:26 AM

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Posted by: Fairy | December 23, 2008 08:15 AM

Posted by: Fairy | December 24, 2008 05:07 AM

This is a great blog with some excellent pointers for students looking to make the most important decision of their academic lives, which is how to ensure financial security for themselves in the future. Thanks

Posted by: Student Loan Consolidation | January 8, 2009 06:09 AM

College is becoming increasingly difficult to afford.
Borrowing money for college is a big responsibility but college remains a smart investment for obtaining a satisfying career that earns a competitive salary.

Posted by: Loan Modification | January 28, 2009 11:52 PM

Obama included tax deductions and credits for college student loans, and with the $1 billion geithner is putting together, it should help to free up the student loan market and start spending again in the economy.

Posted by: Loan Modification | February 20, 2009 10:44 AM

Student loans are tempting. Relatively easy to get them ,but don't forget that you have to pay it back. The new government supports education and are pumping some fresh capital into the financial market.

Posted by: Loan modification help | May 6, 2009 04:31 PM

The government had really done something for student lenders, however, it was not sufficient enough. Though there can never be a perfect solution to all these increasing payables, then maybe the institutions could do something great for the students to maximize their potentials.

www.advanceloan.net

Posted by: advanceloan.net | July 8, 2009 10:10 AM

Paying for college could get even tougher this year as smaller lenders tighten standards and raise rates. But big banks are holding the line.

Posted by: payday loans canada | July 16, 2009 02:52 PM

Unfortunately the students have to realise that the life is not plain already.
This is sad.
To begin the life with difficulties like this.

Posted by: Mortgage loan modification | July 18, 2009 09:55 AM

Student loan is a great thing, but unfortunately it is always too expensive particularly in a crisis.

Posted by: Mortgage loan modification guy | October 29, 2009 06:44 AM

Student loans are always expensive, particularly in the time of a crisis.

Posted by: Mortgage loan modification guy | October 29, 2009 06:48 AM

Very good points here.
I sugject caution however, If you haven't already found out on your own, Student Loan Debt is nearly impossible to get out of.

Bankruptcy won't help!

There's no time limit on the statute of limitations for student Loans!

The Government has given More power to the creditors and their cooresponding Collection agencies To Collect this debt, even garnish wages!

So what can you do to get these creditors off your back long enough to re-group and give yourself a chance?

Posted by: Student Loan Modification | October 29, 2009 03:29 PM

I recently came accross your blog and have been reading along. I thought I would leave my first comment. I dont know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.

Alena

http://grantsforeducation.info

Posted by: Alena | December 19, 2009 03:22 AM

All kinds of loan is not easy go out. Because it will surely give you a very huge debt that is hard to pay. That is why we should think twice on getting our loan.

Posted by: homeowner loans | February 1, 2010 01:35 AM

Harry Moroz

Remember the (Student) Loan Crisis?

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