College & Workforce Readiness

Student Loans Are Feeling the Impact as Credit Crunch Roils Bond Markets

By Michele McNeil — February 25, 2008 3 min read
  • Save to favorites
  • Print

The student-loan industry is the latest market to be hit by the global credit crunch, a development that threatens to drive up the cost of college borrowing and limit access to private student loans.

At a time when the cost of higher education is increasing and college debt is building, student-loan programs in Michigan and Montana hit a roadblock earlier this month when they tried to sell bonds that help pay for their loan programs. Nobody was buying. Iowa, meanwhile, is asking for help from local banks until it can sell its bonds.

Iowa and Montana officials are warning that loans could be harder to obtain, and that interest rates could become higher, as student-loan officials scramble to navigate the tumultuous bond market. Michigan had to suspend one of its loan programs altogether, for an unspecified amount of time.

“After considerable analysis and significant efforts to secure sufficient capital to make new [loans], the difficult decision to temporarily suspend [them] had to be made,” a statement on the Michigan Student Loan Authority’s Web site said in announcing a Feb. 16 halt to one of its low-interest-loan programs.

In all cases, existing loans are solid—it’s new loans that are in danger, which could make life more difficult for students and families seeking college loans for the first time.

The potential student-loan meltdown has captured the attention of Congress. In a Feb. 15 letter to U.S. Secretary of the Treasury Henry M. Paulson Jr. and U.S. Secretary of Education Margaret Spellings, 21 federal lawmakers urged the two to work with each other and with federal financial institutions to ensure the industry stays healthy.

In particular, the members are worried about the Federal Family Education Loan Program, or FFELP, which is expected to provide $60 billion in loans to 6.7 million borrowers in the 2008-09 academic year.

“We, too, are very concerned that this problem could, unless quickly addressed, result in long-term financing disruptions for higher education opportunities,” the letter said. “A mere 10 percent disruption in the [federal loan] market could therefore interrupt financing for more than 670,000 borrowers.”

Samara Yudof, a spokeswoman for the U.S. Department of Education, said her office had received the letter and was reviewing it.

Discussing Concerns

Larry Warder, the acting chief operating officer of the department’s office of federal student aid, said in a separate statement—not in response to the letter—that department officials had met with representatives of the lending industry to discuss the credit concerns. In addition, he said, the department is meeting with colleges and universities that may have had a lender end its participation in the federal loan program. He did not elaborate on which institutions may be affected.

“Thus far, we have not encountered any situation in which eligible [students] did not have access to federal student loans,” Mr. Warder said in the Feb. 20 statement.

Observers predict that the federal student-loan program will stay liquid because the political willpower will be there, especially in a crucial election year in which college affordability is a campaign issue.

“Nobody wants students to not be able to get low-cost student loans,” said Haley Chitty, a spokesman for the Washington-based National Association of Student Financial Aid Administrators.

Private loans—24 percent of all higher education loans in 2006-07, totaling $14.5 billion in undergraduate borrowing alone, according to the New York City-based College Board—could be affected, however.

As is the case in the troubled home-mortgage market, Mr. Chitty said banks may not want to lend money to borrowers without solid credit ratings, or may charge them higher rates. And that could affect low-income borrowers.

“But it’s not completely clear yet. Everyone’s trying to assess what this all means,” Mr. Chitty said. “The scope or impact [of this credit crisis] wasn’t expected.”

In late January, Nelnet, a student-loan company based in Lincoln, Neb., with $26.6 billion in loan assets, announced that, because of the credit crunch, it was not going to offer new loans that consolidate existing federal loans.

Nelnet’s chairman and chief executive officer, Mike Dunlap, said in a statement announcing the policy: “The ongoing turmoil in the credit markets is much worse than we anticipated, and the duration of the disruption is unknown.”

A version of this article appeared in the February 27, 2008 edition of Education Week as Student Loans Are Feeling the Impact As Credit Crunch Roils Bond Markets

Events

This content is provided by our sponsor. It is not written by and does not necessarily reflect the views of Education Week's editorial staff.
Sponsor
Budget & Finance Webinar
Innovative Funding Models: A Deep Dive into Public-Private Partnerships
Discover how innovative funding models drive educational projects forward. Join us for insights into effective PPP implementation.
Content provided by Follett Learning
Budget & Finance Webinar Staffing Schools After ESSER: What School and District Leaders Need to Know
Join our newsroom for insights on investing in critical student support positions as pandemic funds expire.
This content is provided by our sponsor. It is not written by and does not necessarily reflect the views of Education Week's editorial staff.
Sponsor
Student Achievement Webinar
How can districts build sustainable tutoring models before the money runs out?
District leaders, low on funds, must decide: broad support for all or deep interventions for few? Let's discuss maximizing tutoring resources.
Content provided by Varsity Tutors for Schools

EdWeek Top School Jobs

Teacher Jobs
Search over ten thousand teaching jobs nationwide — elementary, middle, high school and more.
View Jobs
Principal Jobs
Find hundreds of jobs for principals, assistant principals, and other school leadership roles.
View Jobs
Administrator Jobs
Over a thousand district-level jobs: superintendents, directors, more.
View Jobs
Support Staff Jobs
Search thousands of jobs, from paraprofessionals to counselors and more.
View Jobs

Read Next

College & Workforce Readiness The Botched FAFSA Rollout Leaves Students in Limbo
Some students wonder if their college dreams will survive.
6 min read
Ashnaelle Bijoux poses on campus, Saturday, April 27, 2024, at Norwich Free Academy in Norwich, Conn. Bijoux, a senior at NFA, has been unable to complete the FAFSA form due to a glitch with the form. Without the form and the financial aid it brings, Bijoux won't be able to pursue her goal of going to Southern Connecticut State University to become a therapist.
Ashnaelle Bijoux poses on campus, Saturday, April 27, 2024, at Norwich Free Academy in Norwich, Conn. Bijoux, a senior at NFA, has been unable to complete the FAFSA form due to a glitch with the form. Without the form and the financial aid it brings, Bijoux won't be able to pursue her goal of going to Southern Connecticut State University to become a therapist.
Jessica Hill/AP
College & Workforce Readiness What the Research Says New Data Paint Bleak Picture of Students' Post High School Outcomes
Students are taking much longer to complete credentials after high school than programs plan.
2 min read
Student hanging on a tearing graduate cap tassel
DigitalVision Vectors/Getty
College & Workforce Readiness This East Coast District Brought a Hollywood-Quality Experience to Its Students
A unique collaboration between a Virginia school district and two television actors allows students to gain real-life filmmaking experience.
6 min read
Bethel High School films a production of Fear the Fog at Fort Monroe on June 21, 2023.
Students from Bethel High School in Hampton, Va., film "Fear the Fog"<i> </i>at Virginia's Fort Monroe on June 21, 2023. Students wrote, directed, produced, and starred in the film through a partnership between their district, Hampton City Schools, and two television actors that's designed to give them applied, entertainment industry experience.
Courtesy of Hampton City Schools
College & Workforce Readiness A FAFSA Calculation Error Could Delay College Aid Applications—Again
It's the latest blunder to upend the "Better FAFSA," as it was branded by the Education Department.
2 min read
Jesus Noyola, a sophomore attending Rensselaer Polytechnic Institute, poses for a portrait in the Folsom Library on Feb. 13, 2024, in Troy, N.Y. A later-than-expected rollout of a revised Free Application for Federal Student Aid, or FASFA, that schools use to compute financial aid, is resulting in students and their parents putting off college decisions. Noyola said he hasn’t been able to submit his FAFSA because of an error in the parent portion of the application. “It’s disappointing and so stressful since all these issues are taking forever to be resolved,” said Noyola, who receives grants and work-study to fund his education.
Jesus Noyola, a sophomore at Rensselaer Polytechnic Institute, stands in the university's library on Feb. 13, 2024, in Troy, N.Y. He's one of thousands of existing and incoming college students affected by a problem-plagued rollout of the revised Free Application for Federal Student Aid, or FASFA, that schools use to compute financial aid. A series of delays and errors is resulting in students and their parents putting off college decisions.
Hans Pennink/AP