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Subprime Loan Crisis Spills
Into Student Loan Programs

     The subprime crisis has spilled over into the student loan program, which means that nearly 50 of the nation’s top lenders are no longer making student loans.
      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.
     “This is the equivalent of a hurricane coming, and staging food and water at the site,” Education Secretary Margaret Spellings said in an interview. “Our responsibility is to be prepared for every eventuality.”
      Some students have learned that lenders will not meet their total financial needs for the fall semester. Meanwhile, loans may not be available for a percentage of students with bad credit histories, who are enrolled at for-profit educational institutions with bad graduation rates.
     “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.”
      Federal lawmakers could throw out a lifeline by thawing frozen debt markets and rescuing cash-strapped firms. Recently, the House Education Committee, which Miller chairs, approved such legislation with bipartisan support. A similar measure was introduced in the Senate last week.

Posted April 23, 2008

     “The turmoil inn the credit markets has become a crisis for some lenders—the question for Congress is how to prevent it from becoming a crisis for students,” said Sen. Edward M. Kennedy (D-Mass.), who introduced the Senate bill. He said that these bills would “ensure that students and families continue to have multiple options for securing the funds they need for college this fall, even if the situation should take a turn for the worse.”       
      The list of lenders who have dropped out includes such major players as College Loan Corporation, HSBC Bank, CIT Group and Washington Mutual. Nineteen of the 100 largest lenders have left. Firms have cut nearly 2,300 jobs.
     “We have an impending crisis in terms of loan availability,” said Mark Kantrowitz, publisher of FinAid, a Web site that provides financial advice for students. “We have an impending crisis in terms of loan availability.
      Currently, the government makes $12 billion available to students through direct loans. There are also other federal and private loans issued. The government is prepared to do more, Spellings said.
     “Families should have concerns about big tuition increases, year over year, and our broken financing system,” Spellings said. “It’s as if we are trying to keep kids out of college.”
      Bills in Congress are seeking to increase the amount of grants available to the poor and raising the cap on how large a federal loan students can take out. Federally backed loans now cover 25 percent of the cost of higher education, Spellings said.

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