Banking and loan problems don’t stay contained in the sub-prime mortgage industry. Borrowing is borrowing, and the availability of cash affects the profitability of the lending industry, whether its in home loans, car loans, or student loans.

The Federal Reserve can try to keep interest rates from spiking too fast by lowering their reserve lending rates, but the market still has to price in risks created by inflation, regardless of what the Fed says is a good interest rate.

As more banks cut off the supply of loans due to insufficient reserves and defaulted sub-prime mortgage accounts, the price of student loans has been rising even though the official interest rates are down. Students are a risky investment to begin with, and right now the financial markets have little tolerance for big risks.

Since many of the student lenders also participate in the federally subsidized loan programs, the recent legislative reform drastically reduces the amount of income they are able to generate from this part of their business. To make up the difference, lenders are: raising rates on private loans; denying loans to students with low credit scores; or getting out of the subsidized loan business all together.

In the long run, this could be helpful for tuition costs as more schools figure out business models that allow them to admit students without necessarily needing loans to pay for it. In the short term, it limits a lot of the options that students have in paying for their college education. Students who qualify for federally subsidized Stafford and PLUS loans may be unable to find a provider who is willing to loan the money at the prices the government requires. Parts of the federal education budget may go unspent – and colleges might have a hard time meeting recruiting goals.

Hopefully, this doesn’t put any schools into bankruptcy. That would be the worst possible outcome, but it would force Congress to consider new legislation to fix the new set of problems they have unintentionally created.

10 Responses to “Credit Crunch Affecting Student Loan Rates”

  1. A little update to this story, the credit crunch doesn’t show signs of slowing down, in fact the aggregate reserves of U.S. banks is currently negative and declining sharply.

  2. In the long run with any luck tuition fees will be reduced, although I do feel sorry for those students who are struggling with getting loans, it was only a matter of time before they got hit by the current financial crisis.

  3. This is not done. Why should students pay for the mistakes committed by banks? There were serious mistakes in their policies which turned them into so much trouble. And having so much bail-out money, they must help students out because already they’ve tensions. First, they made poor decisions (I am sure everyone knows it so i am not discussing it here) at the top which caused this trouble and then now creating problems for students as well.

  4. I’m happy I found this site, I couldnt get any knowledge on this subject matter before. Also manage a niche site and if you are ever serious in doing a bit of visitor writing for me make sure you feel free to let me know, im always look for people to check out my website. Please stop by and leave a comment sometime!

  5. Typical – it’s the same story in the UK. The banks make the mistakes – the students pay. It really makes me mad.


  6. Just stopping by to comment you for the great read. It was really worth my time reading this post. Hoping for more wonderful posts soon! I added your feed in my reader!

  7. Banking and loan problems don


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