I wrote last month that the credit crunch is affecting student loan rates, and despite a few hundred billion in liquidity that has been added to the banking sector, the crunch is still with the student lenders – and the students.

Here’s what happened.  Banks based their reserve limits and total asset calculations from what they expected housing prices to be.  They bought a lot of bonds and securities backed by mortgages.  No one really expected housing prices to come down this quickly, or if they did, they had secured their compensation package and/or personal fortune in something else.  The investment banks kept chasing new investments, only using money that had been generated from the value of homes and mortgages that didn’t exist.

The first hint to the small independent investors was when AAA (triple A) bonds started going bad.  These should, theoretically, be the safest private bonds available – a practically guaranteed source of interest income.  In some cases, they were guaranteed by bond insurers, but well, let’s face it, the insurer can’t really afford to pay everyone  – they’ve had to instead retract their classification of the security as AAA.  And it begs a further question – is there a quality difference among AAA rated loans?  Should there be other classifications that are more specific?

The economy has entered a strange phase of trying to figure out exactly how much money is in it and how much money is based on imaginary home values.  When imaginary dollars are discovered and accounted for, real money has to go into reserve to cover that position.  In short, banks don’t have any money to lend, especially not to students who need student loans!

Brazos Higher Education Service Corp, a top-four student loan holder, announced its exit from the student loan business this last week.  It isn’t the first student loan company, and it probably won’t be the last.  Unfortunately, even as loans should be a last resort, choices and competition help keep the prices as low as possible.  If some lenders are leaving the business, others will raise prices so they can afford to stay in, or they’ll just raise prices because they have fewer rivals competing for their business.

Several public loan programs are experiencing stress, as well.  The crunch is really starting to affect students, not just on private loans but also on ones that have been typically viewed as a form of financial aid.

There are surely tough times ahead for colleges, students, and the economy in general.  American consumption of resources & wealth is coming into alignment with our current income and aggregated debt obligations.  The result is inevitably a decline in available choices and it is the nature of debt that these costs be shifted primarily to the younger generations.

But even as an education might become harder to obtain, it will be more necessary than ever.  Good luck!

3 Responses to “Student Loan Crunch Getting Tighter”

  1. It is astonishing the far reach that events like this can have. The ripple effects of the mortgage loan crisis is another example. I expect a record number of bankruptcies this year, which will just make lenders even more gun shy about approving student credit.

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  1. Carnival of College Admissions, 4th Edition

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