The Student Loan Market Hits the Wall

Student loans - those of us who have them would love to get rid of them, and now, those who want them apparently can’t get them.

The credit crunch has now started hitting the student loan markets, and what used to be a no-brainer prospect - financing your secondary education - is becoming as difficult a proposition as qualifying for a mortgage. The split in the analogy, though, is that while housing prices are cooling to the point where a perfectly qualified mortgage applicant can get a really nice deal on a home, tuition prices are as predictably high as ever.

When I was your age, student loan money grew on trees, and all you had to do was pick up a wheelbarrow and stand under one, and wait for a gentle breeze to blow loose those thick, ripe wads of tuition dollars onto the ground. We would laugh and play and cavort in piles of the stuff as the sun dipped below the horizon, then we would pack our harvest into our carriers and stroll off to our college campuses, our bellies filled with hopes and dreams.

Well, okay, so it wasn’t as easy as that. But compared to today’s circumstances, it certainly feels that way.

The root of the problem is this - so many student loan companies have left the industry, either by choice or by just going bankrupt, that the universe of options for financing your college education is much narrower than it was before. In fact, the only big player in the game is now Sallie Mae, which, by virtue of being big, survived the current crisis (brought on by the effects of the subprime collapse, the credit crunch, and a reduction in federal subsidies to student lenders) but is presently losing money on its loans, and is threatening to stop writing federally-backed loans altogether.

If you are to believe Sallie Mae, their loan demand is running at 3 billion dollars a month, and the company has access to only 1 billion dollars in high-cost funds. All of this points to a potential crisis in student loan availability this summer, as students prepare to enter college. There are some horror stories out there about people who are already well into college who had their loan checks bounce as the new semester began.

The implosion of the student loan market not only affects people just starting college and post graduate studies, it also affects people who have already graduated. One of the best things that you can do after graduation is student loan consolidation - it tidies up your loan payments and locks you into a lower interest rate. But now, most lenders, even Sallie Mae, have exited the federal student loan consolidation business, thus removing one of the most viable options for new graduates who are coping, many for the first time, with the demands of budgeting and money management.

I’m not sure how helpful I can be here, other than to wave the red flag and warn everyone who is planning on attending school in the fall and not thinking too heavily about loan availability. For most high school seniors, setting up financing is probably the last thing on their minds right now, and they’re probably relying on their parents to do a lot of the legwork for them. For parents, they may still be thinking that student loans are as easy to obtain as they were, oh, about 12 months ago, and don’t realize how badly impacted the student loan market has become.

Do someone a favor - if you know someone who is planning on going to college this year, or have a coworker whose son or daughter is in such a situation, let them know about the crisis in student loan availability, and tell them to get cracking on it earlier than they would have otherwise.