Student Loans | Crisis Brewing In The United States 2008

The credit crunch is going to hitting college students submitting student loan applications this Fall (2008), unless legislation is quickly passed to solve the problem. Ironically the problem was caused by the US Congress last fall, when they passed the “College Cost Reduction and Access Act”. This legislation reduced the interest rate on Federal Student Loans, in an attempt by government to dictate the interest rate for college education.

This mandated reduction in the interest rate charged by lenders, in theory, was to help American College Students to afford their education. The reverse effect has happened, as by reducing the interest rate on student loans, the government has mandated a reduction in the profitability on those loans, making them less desirable as an investment to the investors who purchase these loans from banks.

Investors in these loans provide the liquidity to the banks to make future loans. Without this liquidity or capital, banks do not have the money to make new loans.

Recently nearly 70 Student Loan Lenders have suspended their lending, as liquidity has dried up from investors and lenders do not have the capital to make new loans. This list includes the nations largest bank…Bank of America, who three weeks ago stop lending money for student loans.

Congress, the animal who created this problem last fall, by trying to mandate interest rates on student loans and who has no business setting prices in a Free Market Economy, is currently attempting to fix the problem.

Three weeks ago the US House of Representatives passed legislation to allow the Department of Education to purchase loans from lenders on the secondary market, to provide liquidity to student loan lenders, so they can make new loans. The program is called the “Lender of Last Resort Program”.

President Bush during his radio address, called for swift action by the US Senate to follow up and get legislation passed in the Senate to overt this crisis before June when the student loan applications would began to flood the market of the 2008 School Year.

Wednesday, the Senate passed their version and the President is expected to sign the bill into law. This is a prime example of why government has no business trying to mandate prices in a Free Market Economy.

Further, this legislation uses Tax Payer Money to purchase these loans, putting the RISK of student loan default into the hands of the tax payers. This risk belongs in the investors pockets, not the American Tax Payers pockets.