Students and the Credit Crunch

by Katherine Roberts

Today’s headline in The Daily Californian warns us that undergraduate fees are likely to rise as a result of the current California budget. This comes at a time that credit, even for student loans, is extremely tight. According to the Financial Times:

“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.” [Link]

Students, who are already prone to low credit scores, will find higher rates and more scrutiny in the months to come. In an attempt to curb this growing problem, the House passed a bill today that will attempt to guarantee access to student loans by increasing the liquidity of the market.

The bill gives the US Education Secretary the ability to buy student loans directly from the lender. But will this encourage private companies to loan more? Currently, 75 percent of federal student loans are made by lenders who bundle them into securities. Therefore as profit margins diminish across the market, the return on student loans will continue to decrease. According to…

Kevin Bruns, executive director at American Student Loan Providers, a coalition of lenders and guarantors, said a provision in the bill that requires that the loans be bought at no cost to the government meant lenders would have to sell at a loss. This which would be unattractive to most lenders and so might not encourage them to make more loans, he said. [Link]

Still, the fact remains that about 13 percent of the student loans market has simply stopped making loans. How dramatically this will affect the market depends on the number of new lenders willing to enter the market and how serious the House will continue to act upon this problem.

Most student loans are made between now and August, leaving a good amount of time before the true extent of the problem is understood. Similarly, it gives the government and the market time to act and react to this increasing problem.

Making student loans profitable, in a market where credit is generally unprofitable will prove a challenge. The federal limit for student loans was also raised $2,000 for the upcoming year, but it is questionable how much of a difference it will make, especially under the threat of continued tuition increases.

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