And Missing a Few Other Things...

Per Kevin’s post below, a few notes on today’s Washington Post article on student loans in today’s volatile credit markets:

The Post, unlike some other publications, made an effort in this piece to distinguish between federal loans, those guaranteed by the federal government and that carry a fixed interest rate, and private loans, which are completely separate from the government and act like any commercial loan that requires a credit check and carries a variable interest rate. But the Post article switches back and forth between describing what’s happening in these two related but distinct markets, adding to confusion over where students are most likely to see an impact on loan availability.

Private loans are where most of the action is. Prior to this tightening in the credit markets, loan providers were offering private loans, often with extremely high interest rates and fees, to students with poor credit histories or at colleges with poor graduation and job placement track records. Loan companies are curtailing this practice because of the higher default rates among these students. This could actually be a positive development—private student loans are not eligible to be discharged in bankruptcy, and a loan with a high interest rate made to a student with a low chance of graduating or getting a job is more a recipe for life-long indebtedness and a destroyed credit history than it is an educational opportunity.

The potential for decreased private loan availability is cause for concern, though, if it spreads to students with better credit histories. At many institutions, private loans have become an essential part of the financial aid package as tuition prices have continually outpaced increases in federal aid. But, for many students, the additional availability of federal loans for parents (PLUS loans), additional loans for graduate students (Grad-PLUS loans), and increases in loan amounts for students whose parents can’t get PLUS loans should help to cover shortfalls in the private loan market.

On the federal loan side, the industry is seeing less change. The second paragraph in the article points out that students with federal loans (the fixed interest rate, government guaranteed ones) could see higher upfront borrowing fees. The fees the government charges for new loans are nothing new. What’s happening is that private loan companies, which have in the past waived these fees as an incentive to get schools to choose them as a lender, are less likely to offer this incentive in the wake of reduced guaranteed profits from the government and a tightening credit market. But before students fret about increased upfront fees, they should consider that recent legislation also reduced interest rates on subsidized federal loans, a benefit they will see through the life of the loan.

And, it seems that this credit crisis is hurting some student loan companies more than others. Sallie Mae, the biggest, and PHEAA, also a giant in the industry, have announced plans to reduce the federal loans they offer. These two banks were also in the top ten of the student loan securitization market—the market for auctioning student loans to raise money to make new loans and also the market that is having the most trouble. On the other hand, J.P. Morgan Chase, a large bank that is less susceptible to changes in the securitization markets, announced that it would be cutting both fees and interest rates on student loans.

The tightening of the private loan market may help shake out some loans that shouldn’t have been made in the first place and could force some colleges to lower their reliance on easy access to private loan debt. On the federal loan side, the Department of Education should certainly keep an eye on this situation and needs to be prepared to step in as a lender of last resort if the current debt markets worsen and student loan eligibility is genuinely threatened. Right now, though, despite media efforts to sound the alarm, it looks like there are a few worrisome signs, but no real crisis in student loans.