Financial crisis hits students
By
Julie Fry
Published Mar 20, 2008 9:31 PM
For most students, borrowing money has become a necessary part of going to
college. The average student now graduates with at least $21,000 in debt and it
is not at all uncommon for students to graduate with $100,000 in debt or more.
At the same time, tuition at private universities and colleges has enormously
increased—far ahead of inflation.
Parents are losing their jobs or their salaries are declining, so family
contributions to education costs are decreasing. These factors mean that
students from an increasingly broader economic spectrum are more dependent than
ever on student loans.
That is why every student who is attending or is applying to college right now
must be horrified by what is taking place in the financial markets. In
February, it became clear that what was originally reported by the mainstream
press as a crisis in the risky subprime mortgage market, was now affecting what
have been traditionally thought of as incredibly stable investments—like
bonds for student loans.
Here’s what is happening: many state and local governments secure money
for public or quasi-public programs through a venue that most people have never
heard of called the market for auction-rate securities. Before the financial
crisis, auction-rate securities offered the government borrowers a very low
interest rate and it offered lenders (banks and other corporations) ready
access to their cash investment through regularly scheduled auctions for the
bonds, where they could sell their investment and get their cash back on
sometimes a weekly basis. They were earning a higher return than they would
with their money in a bank.
All the investments were insured by companies called bond insurers, which
specialize in guaranteeing this kind of debt. Here is where things started to
unravel. These bond insurers also insure other types of debt—like
subprime mortgages. Now that these insurance companies are going to have to
secure those loans, the banks don’t think they can guarantee student loan
debt as well.
But that is really just one aspect of the crisis. Sallie Mae, the biggest
lender to students, reported a $1.6 billion loss in the last financial quarter.
This was largely reported as resulting from a huge increase in defaults on
these loans. The amount of debt that the Department of Education alone has
accumulated from student loans is now more than $40 billion dollars. In fact,
right now the only bright spot in the student loan market for investors is in
the private collection agency market, which is reporting record profits.
On top of that, the federal government, which subsidizes many student loans and
regulates the interest rates as well, cut its subsidies in 2007, further
aggravating the default situation and the credit crisis.
All this means that what was once considered one of the safest investments is
now among the most risky, with students failing to pay off their debts and no
one available to insure the loss.
Therefore, at the auctions for these loans lately, no one has been showing up
to buy them—which means that the source of money for student loans is
drying up and, not only that, the interest rates on the loans are spiking
sharply.
What does this mean for students? States and universities all over the country
are cancelling their student loan programs. Several private lenders are
withdrawing from the market altogether. And even loan programs backed by
federal government guarantors, like the Pennsylvania Higher Education
Assistance Agency, a state institution, has announced it is abandoning its
federal student loan program. State agencies all over, including Michigan,
Montana, Massachusetts, Pennsylvania, New Hampshire, Iowa, and more have
announced cutbacks in their student loan programs in recent weeks.
Most students will not be applying for their loans for next year until this
summer. So far, the federal government has been telling them they have nothing
to worry about. U.S. Secretary of Education Margaret Spellings told Congress on
March 14 that students could just borrow directly from the Department of
Education, through what is called the direct-loan program. When asked whether
the Treasury Department—the same one that is busy bailing out huge banks
like Bear Sterns and funding the multi-billion dollar war in Iraq—is
going to be able to come up with enough money to account for the loss of much
of the state and private student loan industry, the Secretary merely replied
that she would be ready.
But despite the rosy and calm picture presented by the Department of Education,
the student loan industry continues to crumble, and students are bound to be
affected by either enormous interest rates or no loans at all. Students from
the states affected so far have already reported deciding to leave their
four-year university for a community college, or having to drop out of school
altogether. Many of these students have already completed some of their
education and are already in debt. Leaving school early will leave them high
debt burdens and few prospects for well paying jobs.
Although there have been many struggles over the rising cost of education over
the years, the readily accessible access to funds through loans and the promise
of a relatively high-paying job upon graduation have kept some of the broader
layers of students out of the movement. Now, neither of those factors is a
guarantee. With students over the summer facing the prospect of being locked
out of access to higher education altogether, this economic crisis may quickly
become a political one amongst youth.
Articles copyright 1995-2012 Workers World.
Verbatim copying and distribution of this entire article is permitted in any medium without royalty provided this notice is preserved.
Workers World, 55 W. 17 St., NY, NY 10011
Email:
[email protected]
Subscribe
[email protected]
Support independent news
DONATE