Bye bye American Pie: students become the next victims of the credit crunch
Andrew Clark in New York
The Guardian, Thursday February 14 2008
Americanstudents borrowing money to go to college could be the next victims ofthe global credit crunch as investors back away from traditionallylow-risk securities backed by student loans.
A state lendingagency has suspended loans under a programme serving students at some100 colleges and universities. Experts fear that others could follow.
TheMichigan higher education student loans authority cited "current andunprecedented capital markets disruption" for its decision to axe itsalternative loans programme.
Student loans are typicallypackaged into securities that have a floating interest rate determinedthrough regular auctions - called the auction-rate securities market,worth an estimated $360bn (£183bn). In recent weeks, many of thesebonds have been left unsold.
The auctions are run by banks suchas Goldman Sachs, Citigroup and JP Morgan and traditionally these WallStreet institutions have picked up any excess supply. But faced withstraitened finances and damaged balance sheets from mortgage woes, theyhave stopped doing so.
Matt Fabian, a credit expert at MunicipalMarket Advisers in Massachusetts, said students were likely to see anincrease in the cost of borrowing. "Their funding costs are going to behigher," he said. "Just like in the mortgage market, when thesecuritisation and funding end is affected, lenders have to be muchmore careful about making money available."
As the ripplescaused by the credit crunch travel further through the financialsystem, other types of municipal debt are being affected, includingloans taken out by hospitals, universities and transport authorities.
Thefederal government backs loans on a means-tested basis to the vastmajority of students seeking help with tuition fees. But many seekprivate loans to top up their finances - and it is this borrowing thatis set to become more difficult.
A San Diego lender, CollegeLoan Corporation, conceded on Friday that some of its auctions hadfailed. The Wall Street Journal reported that a further 100 auctionscollapsed on Tuesday.
Justin Draeger, a spokesman for theNational Association of Student Financial Aid Administrators, said:"Obviously we're concerned, we're troubled and we're going to continuemonitoring the situation."
But he added: "I don't think we're inany type of crisis with student loans. The majority of student loansare federal loans and we're not seeing any indication that lenders arebacking away from their federal obligations."
guardian.co.uk © Guardian News and Media Limited 2008