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Student Loans, and the Housing Crisis

posted by Mechele Dickerson

I am honored to have been asked to be a guest blogger on Credit Slips.  Not only is this my first posting for the week, this is the first time I’ve ever posted anything to a blog anywhere.  With that warning, here goes.

Thanks to the metastasizing housing crisis, the Bush Administration is urging Congress to increase the government's participation in the private student loan market.  Rather than just guaranteeing loans, though, President Bush urged Congress in his weekly radio address this Saturday to approve quite broad legislation that is designed to encourage private lenders to continue to remain in the federal student loan program.

Faced with an exodus of lenders, the Bush Administration wants the Department of Education to purchase packages of loans from private lenders that investors currently are unwilling to purchase because of the credit crunch.  The lenders would then have additional capital to make new loans to students.  Though the Administration views this increased participation as only "temporary," the Administration also wants to increase the Department of Education's role as a "lender of last resort" to further ensure that private lenders, and perhaps nonprofit companies and state agencies, will continue to make loans.

This is, of course, the most recent in a series of attempts by the government to calm fears in the capital markets.  Other recent attempts include repeated interest rate cuts by the Federal Reserve, and the Fed's bailout of investment giant Bear Stearns.

On one hand, this is a very good thing.  It's basically a preemptive strike since the peak season for loan applications is still months away as students are still in the process of receiving their acceptances letters from colleges.  And, while students who attend traditional four-year colleges do not appear to be at risk, several lenders within the last week have stated that they will stop making loans at unprofitable institutions, which likely means students at community and for-profit schools will find it harder to borrow money to finance their education.  Given the demographic characteristics of students who attend those institutions, a student loan crisis likely would have a disproportionate impact on older, lower-income, Black and Latino students.

On the other hand, though, one could rationally question the wisdom of the Government's involvement in what may be yet another scheme to move weak, risky loans from a private lender's portfolio to the Government under the guise of providing liquidity in the market.  Given the ongoing controversies surrounding Fannie Mae and Freddie Mac's participation in the mortgage securitization market, one wonders whether the Department of Education will do a better job of examining the loans it is purchasing, or whether it will allow lenders to dump the riskiest, worst-performing loans on the Government. 

Also, one hopes that this high-profile stand for education is more than just a no-child-left-behindish sound bite designed to give the appearance that the Bush Administration and the Congress have carefully considered the current debt crisis.  Or, that they truly have a clue about what is happening to consumers, or how best to help consumers who are swimming in debt.  Only time will tell, I guess.

Speaking of consumers and debt -- assuming I remember to take my laptop, I hope to (in the words of former guest blogger Nathalie Martin ) “channel techno-guru Bob Lawless and blog live” at the end of the week.  As Bob mentioned in his kind introduction, I am attending the University of Illinois College of Law conference on A Debtor World: Interdisciplinary Academic Symposium on DebtEven if I take the laptop, my bogs won't be in real time.  But, if I can get a better grip on this blogging thing by the end of the week, I hope to increase my posts on both Friday and Saturday to give you a somewhat timely view view on what the speakers/commenters are saying at the conference. 

Comments

Welcome! Looking forward to this disc. and your posts. Ive been waiting for this one. I may have to amend this one when I have access to the cases on my computer at work.

If we are talking "Bankruptcy" and Student loans, then what can the gov. do that they have not already done? ie.. taken discretion away from BK judges to determine dischargeability.

We are getting flack from truck driving schools on the dischargeability of that kind of student loan. "Educational Benefit" sticks out to me for some reason. Even in cases where the BK judges have FOUND that there was a hardship, I am still seeing the Cir.s overturn them as a matter of law, for something like "debtor did not show that he tried in good faith to pay the student loan before filing bk" (not an exact quote..smtg like that). To me it reads like it did before except for that stupid phrase "provides an educational benefit".

I guess my point is: What are they whinning about? Its already next to impossible (closer to impossible than next)to discharge the darn things and on top the interest is still running! Most debts like that you can spit into priority, and unsecured like we do with IRS debt. BUT NOOOOO! Not student loans. They are as close to a "sure thing" as you can get, in bankruptcy anyway. Heck we have even given up trying to pay them in 13s... When you have a right to cure!

When they changed the bk laws to exempt student loans from discharge is when student loans went from the gov to private lenders and NOW we have a liquidity problem???? What the heck? Even in a states like Texas they can still garnish pay checks, tax refunds and ....... did I miss anything? Oh... place a lien on your home.

Sorry if I sound angry, I'm not. I am just smarting a bit from an adversary I worked on last year.(we didn't even lose and it worked out well for the debtor. The whole thing was just frustrating is all).

As with housing, there might be too much credit in student loan land.

Our intrepid blogger said that the crunch would hit community colleges and for-profit trade schools. I have no brief against community colleges, but a lot of the for-profits are ripoffs: machines for gathering student loan proceeds with no educational benefits. The bad ones tend to generate high default rates, because their students don't get the jobs that were sort of promised to them by the for-profits. (The ad giveth; the fine print taketh away.) If a credit crunch would hit these guys' business model . . . two cheers for credit crunches!

I have to agree with Joe about the for-profits.

If you are local, then your community college will be the best bet in that they are less expensive yet on the other side, community colleges are used by people who can’t normally afford regular universities w/o scholarship/grants etc. They are also used to mitigate the costs of a college education. If there is a price tag on students or risk factor, then regular universities may have more of a potential for the run up of debt.

College tuition of course does not follow the regular models of inflation. It always seems to out pace it by far year after year after year.

I posted a commentary on the four bills currently pending in Congress on this issue on the GovTrack Blog. The Bush administration is hardly the only culprit in this unwise buyout - HR 5715 was introduced by a Democrat and passed the House of Representatives with a whopping majority on both sides of the house, with very little discussion.

Not all for-profits are alike. My husband earned an AA and BA from a well-known technical for-profit, was able to work part and then full time while in school, paying a significant part of the tuition as he went along. He tripled his income after obtaining his degree. This was the best investment we've made in the last 10 years and the payback on the student loan is not even remotely a burden due to the new income.

Before starting, he researched a number of technical schools in the area and was impressed by this school's statistics on graduation rates, median income at graduation and median months spent between graduation and employment.

Anyone considering a for-profit should consider the match with their interests and career goals and should do their homework with respect to alumni success.

Ms. Sherwood has clearly spent much, much more time reviewing the various student loan bills than I have. For those who are interested in her longer analysis, I found the blog entry referenced in her post: http://www.govtrack.us/blog/2008/04/29/student-loan-bailout-bills-rife-with-fiscal-pitfalls/#more-100.

I received a private response that also provided a bit more information about the proposed student loan buyback. The student loan legislation requires the loan purchases to be "made in the best interest of the United States and to result in no cost to the Federal Government." Of course, this doesn't mean that lenders won't try to dump their poorly performing loans on the Government and on could easily see how a deal could be deemed to be in the Government's best interest even though others might question the deal. But, in theory, the Education Department can assess the quality of loans it is buying, since the loan default rates for schools are published on the Department's web page.

Is it possible to avoid student loans and credit card debt by moving to Canada?

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