Q: How has the credit crunch affected student loans?
A: Turmoil in the financial markets that started with the bursting of the home mortgage bubble has affected other types of loans. There have been reports of lenders across the country leaving the student loan business altogether, leading some to worry that students might find it more difficult to obtain loans needed to finance their education. With the ever increasing price of tuition, more students are relying on federal student loans and, increasingly, private student loans, to make their higher education dreams a reality.In a letter to the Committee on Banking, Housing and Urban Affairs, Federal Reserve Chairman Ben Bernanke cited two reasons why lenders have exited the student loan market. He said that market turmoil has caused the cost of funds for lenders to increase sharply and that the lenders’ reimbursement rate from the federal government was cut through legislation passed by Congress last year. Student loans are tied strongly to the bond market, as bonds are used to securitize student loan debt and provide the capital to make new student loans. As the bond market has slowed with recent market conditions, so have the liquid funds that lenders have to offer to students for college loans. Chairman Bernanke also suggested that Congress consider revisiting last year’s cuts and devise a more market-sensitive approach to subsidizing student loans.
Q: How is Congress working to fix the student loan problem?
A: Congress has just passed the Ensuring Continued Access to Student Loans Act of 2008. This bill increases loan limits offered to students so that they will be able to take out more in federal student loans and rely less on private student loans, which are likely to be scarcer and more expensive. The bill also helps parents pay for their students’ education by allowing them to defer repayment for up to six months after the student leaves school. It also ensures that parents hit by the mortgage crisis could still qualify for parent loans in order to pay for college for their children. To temporarily address the underlying problem, the bill also gives the Secretary of Education authority until July 2009 to purchase loans, if needed, in order to increase the amount of liquid assets the lenders would have to continue to make student loans available. This short-term measure will help ensure that students have access to the funds they need to attend college this fall while Congress contemplates whether longer term remedies are needed.