Student Loans and the Mortgage Crisis
Pete Davis watches the congress
Student Loans May Be Impacted by the Mortgage Crisis | Capital Gains and Games: Just as students are about to apply for their loans for next fall, many lenders have stopped making student loans. This week, two of the largest, Citicorp and Bank of America, pulled out. Higher educational institutions are rapidly switching back to direct loans from the government, but the Department of Education may be swamped despite the fact that no student has been denied a loan yet and despite DOE's claims that it's ready to make loans that private lenders won't.
Sallie Mae's CEO Albert Lord wrote two days ago... "we can only meet the enormous student credit demands we are seeing at Sallie Mae if there is a near-term, system-wide liquidity solution." In other words, Sallie Mae's CEO called for a government bailout.
Yesterday, that's just what the House of Representatives passed in H.R.5715 by an overwhelming 383-27. The bill expanded the size and availability of student loans, and it made more explicit that the Department of Education, operating through state guarantee agencies, would operate as a lender of last resort. Senator Kennedy (D-MA) has proposed a similar bill, S.2815, which the Senate may take up soon. President Bush issued a Statement of Administration Policy (SAP) on H.R.5715, which promised students that they would get their loans and which promised to work work with Congress if that became necessary.
The House Education and Labor Committee hearing on March 16th and the Senate Health, Education, Labor, and Pension Committee hearing on March 17th offered detailed testimony on the situation, as not a crisis yet, but which could quickly become one in the future.
What's behind all of this?
First, the mortgage crisis has driven investors away from securitized assets, including student loans. That has driven up the cost of financing student loans beyond the interest income and fees from those loans. Second, last year, the law on student loans was changed, effectively cutting the federal subsidy in half. Third, a pitched battle has been fought mostly between Republicans and Democrats over who should make student loans. When President Clinton came to office in early 1993, he was able to establish direct lending from the taxpayers to students, but just about every student loan bill until last year's pared back direct lending in favor of private lending.
Now that the mortgage crisis has spilled over into student lending and private lenders are pulling, you have to ask yourself, "Why are we going through this?" Economists generally prefer market mechanisms to government programs, but there are market imperfections and externalities that can tip that balance back toward government programs. We got to this point after decades of debate over that issue with regard to student loans. Now that the mortgage crisis threatens, we will see if it ends private lending to students over the summer.
