Subprime Tentacles: Student Loans

Having infected the municipal bond market, the subprime disaster may soon spread into the student loan program. (Hat tip: Acheson). The Pennsylvania Higher Education Assistance Agency

convened an emergency Student Loan Funding Summit today, bringing together a diverse group of state and federal government, higher education and financial leaders to address a potentially devastating shortage of student loan funding for students and families.
This student loan funding crisis began with the recent subprime mortgage meltdown and subsequent turmoil in the capital markets. These far-reaching economic problems have now given rise to a new bond market crisis, which is further compounding the funding problem for many lenders.
As a result, lenders throughout the nation are exiting the $50 billion Federal Family Education Loan Program (FFELP) while others are being forced to curtail their activity, seriously jeopardizing the funding plans of millions of American students. In recent weeks:

  • College Loan Corp, the nation’s eighth largest student lender, ended its participation in the FFELP program.
  • Iowa Student Loan Liquidity Corp announced that it is unable to properly fund loans for the 2008-09 school year.
  • Michigan suspended one of its college loan programs.
  • Montana’s student loan agency tried unsuccessfully to sell $583 million in bonds during the last ten days, which means it will be more difficult for the agency to make student loans.

PHEAA, itself, experienced “failed auctions” in the troubled bond market for the first time in its history, substantially increasing its cost of borrowing and putting its ability to fund additional student loans at risk.
“As many Americans face foreclosure on their homes, millions of college students may now face foreclosure on their plans for a higher education,” said State Representative William F. Adolph, Chairman of the PHEAA Board of Directors. “We must act quickly and we must act now – before our students are caught in a painful student aid funding crunch that could put their college plans financially out of reach.”

More education has been the answer many have given for our becoming more competitive in the global workplace. If millions of students find college out of financial reach, then that answer may soon disappear.