07.01.2008 0

As College Lenders Back Off, Education Department Seeks to Expand Powers

  • On: 07/20/2008 14:37:51
  • In: Fiscal Responsibility
  • What would you do if you were near a tower doomed to fall? You’d probably get out of the way.

    That’s exactly what lenders appear to be doing. With the fall of securities in light of the credit crisis, student lenders throughout the nation have stopped issuing Federally-backed student loans. This has prompted the Federal Education Department to begin preparing a “lender of last resort” program and to further increase the Federal government’s role in education. According to the Washington Post:

    “Nearly 50 student lenders, including some of the industry’s biggest names, have stopped issuing federally guaranteed loans in recent weeks because of paralysis in the credit markets, confronting students with higher borrowing costs just as they are starting to apply for financial assistance for the coming school year.

    “These companies represented 12 percent of the market before they left, and analysts say this is just the beginning of an exodus. 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.”

    The “traditional funding sources” were securities, which are bundled up loans sold on the debt markets. But these are drying up as a source of money for the student loans:

    “Most lenders rely on the securitization of debt to generate enough cash to issue student loans. This process turns ordinary loans into securities, just like stocks, so they can be bought and traded on the debt markets. But lenders have been unable to securitize any loan made after Oct. 1, when a cut in federal subsidies to lenders went into effect. A few weeks later, the credit crunch that began among troubled mortgage securities started to ripple across the student loan industry. Both developments dried up investor appetite for student loans.”

    Universities are also reporting that students will not have enough financial aid for the upcoming year:

    “Some colleges are already saying that their students’ expected financial needs for the fall semester are outstripping what lenders are willing to provide… ‘Schools are telling us they are starting to scramble, that they are being told by their lenders they won’t be able to handle the volume of loans,’ said Rep. George Miller (D-Calif.). ‘They think there will be a gap between supply and demand.’”

    So, in other words, the costs of higher education are growing so fast that not even the banks can keep up! And what is Big Government up to? Looking at how to keep costs under control? No, instead it is looking for ways to expand Federal funding for college loans:

    “If firms continue to get out of the lending business, the federal government could expand the number of loans it provides to students, [Education Secretary Margaret] Spellings said.”

    Of course, this is a predictable Big Government solution: when a debt crisis hits, increase the amount of loans to be given out. That’s a lot like trying to fix a leak with more water.

    Student lenders are probably doing the right thing in backing off from giving out so many loans, which had reached record numbers this decade. If student loans start going into default again like they did in the 1970’s, there will be yet another call for a Big Bailout by the Federal government. Big Government is trying to promote false confidence in a system that is crumbling before our eyes like the doomed tower’s foundations.

    ALG Perspective:
    The U.S. economy is addicted to debt. The education system does not operate without loans, the housing market cannot operate without loans, Congress is constantly digging a deeper hole every year with out-of-control spending, and the national debt has more than doubled in the past decade. Even with only 2% of mortgages in default, the ripples in the financial industry have been felt in every sector of that industry, including student lending. The right prescription is to begin to look at ways of weaning the country off of debt, not keep pumping cement under a tower that is destined to fall.

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