Bankruptcy

Student Loans, and the Housing Crisis

By Mechele Dickerson

Faced with an exodus of lenders, the Bush Administration wants the Department of Education to purchase packages of loans from private lenders that investors currently are unwilling to purchase because of the credit crunch.  The lenders would then have additional capital to make new loans to students.  Though the Administration views this increased participation as only "temporary," the Administration also wants to increase the Department of Education's role as a "lender of last resort" to further ensure that private lenders, and perhaps nonprofit companies and state agencies, will continue to make loans.

This is, of course, the most recent in a series of attempts by the government to calm fears in the capital markets.  Other recent attempts include repeated interest rate cuts by the Federal Reserve, and the Fed's bailout of investment giant Bear Stearns.

On one hand, this is a very good thing.  It's basically a preemptive strike since the peak season for loan applications is still months away as students are still in the process of receiving their acceptances letters from colleges.  And, while students who attend traditional four-year colleges do not appear to be at risk, several lenders within the last week have stated that they will stop making loans at unprofitable institutions, which likely means students at community and for-profit schools will find it harder to borrow money to finance their education.  Given the demographic characteristics of students who attend those institutions, a student loan crisis likely would have a disproportionate impact on older, lower-income, Black and Latino students.

On the other hand, though, one could rationally question the wisdom of the Government's involvement in what may be yet another scheme to move weak, risky loans from a private lender's portfolio to the Government under the guise of providing liquidity in the market.  Given the ongoing controversies surrounding Fannie Mae and Freddie Mac's participation in the mortgage securitization market, one wonders whether the Department of Education will do a better job of examining the loans it is purchasing, or whether it will allow lenders to dump the riskiest, worst-performing loans on the Government. 

Also, one hopes that this high-profile stand for education is more than just a no-child-left-behindish sound bite designed to give the appearance that the Bush Administration and the Congress have carefully considered the current debt crisis.  Or, that they truly have a clue about what is happening to consumers, or how best to help consumers who are swimming in debt.  Only time will tell, I guess.

Full post as published by Credit Slips on April 28, 2008 (boomark / email).