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. Read more