Wednesday, April 09, 2008

New Yahoo Column: Student Loan Credit Crunch

In the past month, the media has been jam-packed with stories about a supposed student loan credit crunch. It's true that, as a result of the general turmoil in the credit market, some lenders have decided to stop offering both federal and private, unsubsidized student loans. The requirements have also been tightened for those borrowing private loans.

But the experts I've talked to say there's no crisis. In fact, there may be a silver lining to the credit upheaval: a saner market that steers more students and families toward safer, cheaper, smaller, federally guaranteed loans.

Update: Congress has moved fast to ensure continued loan access--there's supposed to be a vote today in the House on the “Ensuring Continued Access to Student Loans Act of 2008.” According to the USSA and the PIRGs, it's a mixed bag. They like the enhancements to PLUS and Direct Loans, but not the sops to the lenders. Big picture:
"Every year, nearly 400,000 academically qualified high school graduates do not pursue a four-year education. For many of those students, cost—or fear of cost—is the main deterrent. We know some of these students, particularly those from low-income families, may be debt-averse, unwilling to take on even reasonable levels of student borrowing. In light of the real challenge we face persuading students to responsibly invest in their education, we believe any discussion of a potential credit crisis should conducted with great circumspection and care. We believe that the student loan industry and its surrogates have sought to play up the risk of a crisis in the media in hopes of reversing the cuts to their excess subsidies enacted by you just last year. While those familiar with the industry recognize the perennial game of chicken it has played with Congress over subsidies, these interest groups are sending an insidious and dangerous message to students and families around the country about access to college. "


Anonymous said...

Ha, typical story from an SLJ member and backer.

"We believe that the student loan industry and its surrogates have sought to play up the risk of a crisis in the media in hopes of reversing the cuts to their excess subsidies enacted by you just last year."

That has to be about the most ridiculous statement I have heard in my life. I suppose the companies that have stopped making loans and those that have closed their doors completely are just playing a little game of cat and mouse. What a complete bunch of crap.

Try telling this to the unemployed workers from:
Student Loan Express
Graduate Leverage
Next Student
College Loan Corporation

All of the above have been forced out of the business because of the current credit crunch that you speak of. Trust me Anya, it is not a game of chicken. I understand that you and your buddies over at SLJ think all these companies are packed with criminals, but to suggest that they are artificially trying to manipulate the perception of tough times is a bit over the edge, even for you. Not everything is a conspiracy.
What really confuses me is that all of you who are so against the student loan companies of the world should be rejoicing at their demise. Perhaps SLJ's true goal is not that these companies go under, but that somehow, someway, they can get out of paying back their loans.
So you are certainly free to think what you would like, but when September comes and students are scrambling to find enough money to attend college, I'd like to hear a retraction from you.


Anya said...

Find me one student who has failed to get a loan because of the "credit crunch"?

bratgirl9 said...

I need help. My husband and I pay out literally every dime we have to our mortgages (two, subprime -- house values less than we owe) and our $30,000 in credit card debt combined with a $23,000 car loan. Our parents help us to feed our kids. I am in law school, and my program requires that I stop working at the end of this month. I have waited twelve years for this opportunity, and my entire family has pooled whatever resources they have to make it work. However, I cannot get out from under this debt. We are considering all options, but bankruptcy cannot be one because it will impair my ability to be admitted to a bar when I am done with law school. What can I do? We will be living on $24,000 net for the next year, and that just pays the house? I am tired of suggestions for people at the income bracket above us. That suggestion is "spend less, save more, pay more than the minimum." What advice do you have for those who haven't any (I mean any) extra ever to pay down debt?

I know you may say -- don't go to school, but I will tell you that there never has and never will be a time that is good to go. I have only gotten into more debt over time. My parents are aging and will not be able to help me by watching and feeding my kids forever. Now is the time. So, please help me find solutions for the truly needy. The suggestions out there are for people who don't need as much help.

Anya said...

bratgirl--I am truly sorry that you are having such awful difficulties. I don't see how you can get out of it without walking away from at least some of the obligations you've taken on. From what I can understand you could
1)Sell the house in a short sale or just walk away.
2) Take time off of law school and work to get out from under the credit card debt.
3)Is there no way your school can allow you to continue working if you are in such dire straits financially?
4) Definitely, sell the car for what you can get for it, and buy a used car for a few thousand dollars. It is hard to understand how someone in so much debt can be driving a $23,000 car.

Termloan said...

Reply to the "find me one..." comment made by Anya:

There are a growing number of reports of lenders in various states that have had to suspend disbursements of student loan funds due to the failure of the auction-rate securities market of the past few months. Many lenders financed their loans with variable-rate debt that needed to be rolled over as frequently as every week. With this market no longer functioning, these debts began incurring "penalty rates" of interest that are far higher than were budgeted for. As a result, several state-related student loan agencies had a very sudden deterioration in their finances, and this problem has yet to be resolved.

Anonymous said...

"Find me one student who has failed to get a loan because of the 'credit crunch'?"

Find me one person whose house was flooded before Katrina hit.

For the life of me, why are the liberals buying into the Bob Shireman-Luke Swarthout propaganda that there is no problem. As Jonathan Glater reported today in the NY Times, there are families whose college decisions are being affected. When did liberals stop caring about people like that?

Anonymous said...

Note to both "termloan" and "StudentLoanJusticeExposed": I worked at a major investment bank until recently. I have no doubt that the wider spreads on asset backed securities (ABS) including auction rate securities being issued by these student loan companies (and even state government sanctioned agencies) are hurting them as is, more importantly, last year's legislation that reduced subsidies for them in terms of a lower government guarantee on losses as well as lower guaranteed interest earned on these loans. It is the economics of the FFELP program as a whole (especially for FFELP consolidation loans) in the current environment that is hurting these companies' earnings. However, all I have to say to these companies is "cry me a river". These companies have for so long been (1) milking government subsidies every which way and sometimes in illegal ways, (2) making false promises of benefits such as interest rate reductions to students on their loans after X number of "timely" payments and then disqualifying them over some technicality and (3) screwing over the (foolish) investors in their ABS by pulling out even more money against the student loans by overissuing ABS.

The business of making student loans is just that for these companies - it's only business and not public service in the least. When private student loans started to look relatively more profitable since last year's FFELP legislation, they started to gravitate towards that product provided that they could set up the loan underwriting and servicing systems to do so. Even Sallie Mae has announced that they will be moving away from making FFELP loans and increasing production of private student loans (regardless of the credit crunch) since the latter are more profitable. I think that the whole FFELP program was a flawed idea to begin with and government should have directly made these loans to prevent abuses in the system given them the customers are typically young students. The Direct Lending Program (DLP) - look it up - is available to all students seeking Stafford, PLUS and Consolidation loans. The government's curtailing of the subsidies it pays out to the FFELP program last year was a genuinely responsible thing to do fiscally. I was surprised that the legislation made it through both houses and the president despite strong opposition from the student loan industry's lobbyists.

So, do you or your friends need a student loan? Then go to ...the government is always available to lend to you DIRECTLY and your school's financial aid office may be able to help you with the application ...and as far as private student loans are concerned, stay as far away from them as possible unless you KNOW that your chosen career will land you with sufficient income during your first 2-3 years out of school to FULLY pay off these private loans. If you are unsure, don't borrow under any company's/bank's private student loan program.

Finally, thanks Anya for the great article and for highlighting correctly that federal student loans remain available to those who need them. There is a plus side to this credit crunch: Our country's Department of Treasury has not had any problems whatsoever with issuing fresh Treasury notes to fund student loans or any other federal program; in fact, its only become cheaper for them to due so during this time of flight to quality and low yields on government debt.

- An Ethical Banker (note: a genetically obscure and rare breed)

Anonymous said...

By the way, all the focus seems to be on the availability of student loans. Why isn't anyone talking about why tuition at 4-year public colleges across the US has increased by about 225% and that at 4-year private colleges has increased by about 154% since 1990? These increases are significantly above the rate of inflation. At the same time, giving from alumni to their alma mater continues. Where is all the money going? Just like we need a cap on how much medical care and pharmaceuticals in this country cost, we need a cap on the rate at which tuition costs are allowed to increase. Perhaps this cap should be worded such that the increase is no more than the increase in Americans' incomes.

Tracker said...

The "crisis" really isn't having much of an effect on the availability of credit. It's still pretty easy for a person to get up to their eyeballs in debt.

The problem is, the US dollar has nothing of value to back it up except debt. A dollar only comes into existence when somebody takes out a loan. So, in order for there to be enough money in circulation for the banks to make a profit on interest, the global money supply has to constantly expand. They have to lend money out faster than it's repaid, because once a loan is paid off, the money originally created from that loan ceases to exist. Money as Debt is an excellent short video that explains how the system works, even if it is overly simplistic in some respects.

After nearly 100 years of this exponential expansion of the money supply, we have reached a point where the rate of increase required to sustain the system has become nearly vertical. Unfortunately, it's impossible to maintain that kind of growth (even with wars and easy mortgages), and the entire banking system is beginning to experience a systemic collapse. Take a look at this chart of the M2 money supply from the Federal Reserve.

A fiat money system has a limited lifespan, and the US dollar is reaching it's end of life. The bankers are beginning to realize this (although they won't admit it), and it scares them to death.

The politicians are still oblivious, and they continue to get elected by making promises to spend money as if there is an endless supply available to the government. The fact is, in order for them to continue to spend to freely, money has to be borrowed, and this depends on a healthy private banking system, which the Federal Reserve is part of. The money collected by the IRS does nothing but pay the interest on the national debt.

The vast majority of congress has no idea how our monetary system works, and all of the major presidential candidates want to continue to spend freely, whether it's through the military or domestic programs. This cannot continue much longer, and it will come to an end fairly soon. The change will have to be a drastic one, and I seriously doubt that it will happen voluntarily. There just isn't enough political will to make the enormous cuts in spending that are necessary to reverse the trend.

Look for $5 bread and $10 gas soon, and have a nice day. :)

Anonymous said...


If you are looking for you "one" i would check the front page of the boston globe tomorrow.

i work for a major student lender. for the sake of my job im going to stay anonymous. but trust me, this isnt bs. things are about to get real bad. not for everyone by anymeans.

students who attend good schools (title IV, not for profit, 4 year, with decent graduation rates, and low default rates) will be fine. I would say about 80% of all US college students fall into that sector. They will be even better if they have good credit or a cosigner. If they are going to a 2 year school, etc, or have bad credit, they may need to get very very creative to make it.

todays announcements are the begining of a very very large wave. there will be massive lenders who close thier doors in the next few months.

just a heads up.

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