The mortgage and credit crisis may have landed one more unexpected casualty: college students. The Financial Times reports that “A rising number of private and public lenders have been backing out of offering student loans, hit by the fallout from the credit squeeze and the declining profitability of federally-insured education loans.” Adding to this problem, “The effect of the squeeze in student loans is likely to hit those with poor credit scores and low incomes. Plus loans (made only to parents with decent credit histories), which provide the most comprehensive student financing, require credit checks, including history of foreclosure.”
Warning signs have been visible for months. It’s long past time for the Department of Education to make sure that all students have access to student loans. It should expand the existing direct student loan program (which is also cheaper for taxpayers), work with states to establish lenders of last resort, and look at ways to help struggling students. However, Congress should resist the student loan industry’s cries for a bailout; the “industry” is already heavily subsidized.
Here’s a timeline of how this has unfolded:
Late January 2008
– Sallie Mae, the nation’s largest provider of student loans, states it will “no longer make private education loans to students who are higher credit risks, so-called subprime borrowers.” For-profit education companies, typically reliant on students’ access to private loans, feel the sting. A number of education stocks, including Hoffman Estates-based Career Education Corp., experienced big sell-offs on fears that the schools could see a decline in enrollment.
Early February 2008
– Auctions of securities tied to student loans conducted by Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Citigroup Inc. fail to generate investors’ interest, leaving roughly $3 billion of such securities in a sort of limbo.
Early March 2008
– Sallie Mae announces it is “tightening credit requirements for borrowers and pulling out of offering loans to students attending some for-profit career schools and community colleges.”
Mid March 2008
– Bear Stearns crisis
Late March 2008
– The US House Committee on Education and Labor holds hearings imploring Margaret Spelling, US Secretary of Education, to ensure a lender of last resort program was operational and ready to go. Chairman George Miller explained, “If it takes this long to get the program into shape, what happens if, in fact, they are going to need it?”
Early April 2008
– 12% of the student loan market, nearly 50 lenders, stopped issuing federally guaranteed loans. The Washington Post reports that, “That is because virtually all student lenders have been shut out of their traditional funding sources on the debt markets. Dozens of other lenders that offer private loans, which have no federal backing, have also dropped out.”
April 15, 2008
– The US Senate Committee on Banking holds a hearing asking industry executives from Sallie Mae, FinAid.org, and The American Securitization Forum, along representatives from the education sector, to comment on “how the tightening of credit, a result of the subprime mortgage crisis, may make it more difficult for some student lenders to provide educational loans for students and their families.”
– The nonprofit Massachusetts Educational Financing Authority announced it will stop offering federal student loans on July 1, 2008. MEFA made federal loans to 14,700 Massachusetts students in the current school year.
April 17, 2008
– Sallie Mae releases a report stating that they have “eliminated about 1,000 jobs over the past six months, representing about 9 percent of its workforce.” “Under current conditions . . . loans can only be made at an economic loss,” the company said in a news release announcing its financial results for the first three months of 2008. Sallie Mae lost $103.8 million (28 cents a share) in the first quarter of 2008, compared with a profit of $116.2 million (26 cents) in the first quarter of 2007.
– The U.S. House of Representatives passes legislation allowing the Education Department to purchase student loans and raising the amount students can borrow. The Senate plans similar legislation.