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Anya Kamenetz Generation Debt

Anya Kamenetz, Generation Debt

There Is No Student Loan Credit Crunch

by Anya Kamenetz

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Posted on Tuesday, April 8, 2008, 12:00AM

In the past month, the media has been jam-packed with stories about a supposed student loan credit crunch. It's true that, as a result of the general turmoil in the credit market, some lenders have decided to stop offering both federal and private, unsubsidized student loans. The requirements have also been tightened for those borrowing private loans.

But the experts I've talked to say there's no crisis. In fact, there may be a silver lining to the credit upheaval: a saner market that steers more students and families toward safer, cheaper, smaller, federally guaranteed loans.

Anatomy of a Crisis?

Talk of a student loan crunch or crisis boils down to this: According to the comprehensive financial aid Web site FinAid.org, 45 education lenders have limited, suspended operations, or quit participating altogether in the federally guaranteed Federal Family Education Loan Program (FFELP). The Pennsylvania Higher Education Assistance Agency (PHEAA), a state guarantor which provides loans to 140,000 students in Pennsylvania, is one of them.

"Our auctions failed," PHEAA's spokesperson Kevin New explains.

PHEAA, like many lenders, financed their new student loans through the auction of asset-backed securities -- bonds representing bundles of loans. Asset-backed securities are the same financial innovation that powered the mortgage market, and the uncertainty about the value of these securities is putting a freeze on the secondary market for student loans as well.

Yet New assured me, "We really don't see a lack of access to low-cost federal student loans in the coming academic year."

That's because there are still hundreds of lenders participating in the FFELP program; only about 10 percent have bowed out. The federal government has an obligation to guarantee access to federal student loans for students who qualify. And even if more lenders left the FFELP program, the Direct Loan program, which already handles a quarter of student loan volume, could step in to provide more loans directly from the Treasury. Direct loans are cheaper for taxpayers than the FFELP program because there are no lender subsidies, so that would be a win for everyone.

In fact, as a result of legislation passed last year, federal student loans for the coming academic year are actually set to get even cheaper. They are going from a 6.8 percent interest rate to 6 percent, and over the next five years they will hit a 3.4 percent interest rate. At the same time, there will be more repayment options and assistance for students.

Subprime Student Loans?

The market for private, unsubsidized student loans is a different story. Just to be clear on the distinction, federal student loans are subsidized and guaranteed by the federal government. Whether you know them as FFELP, Stafford, Perkins, or PLUS loans, they have a fixed interest rate and are subject to annual limits. You must fill out the FAFSA form (Free Application for Federal Student Aid) to get a federal student loan.

Private or "alternative" student loans generally have much more expensive, variable interest rates and less favorable terms for borrowers. They are available in much larger amounts and have been spreading like wildfire -- until now.

"A number of private lenders are still in the market, but others have withdrawn, and almost all have or will be tightening their credit criteria," says Kevin Walker, cofounder of SimpleTuition.com. He says the likelihood that a private student loan will require a credit-worthy cosigner has risen from 75 percent to 95 percent, and the minimum credit score has risen from the 630-650 range up to 680-700.

Student advocates say this is actually a much-needed corrective in the market, especially for low-income students.

"The ability to resell loans encouraged lenders to make riskier loans," says Luke Swarthout of the U.S. PIRG's Higher Education Project. "Private lenders started making subprime loans to schools with high default rates and low graduation rates."

This is true especially of for-profit "career colleges" that aggressively market high-cost programs of dubious value to low-income students. Many private lenders are now pulling out of making loans to students at these types of schools altogether, which may lead more young people to choose higher-quality community college programs instead.

What Students and Parents Should Do Now

Reevaluate your need for student loans. If your education plan involves $50,000, $100,000, or more of debt, then maybe it's time to explore a cheaper, closer-to-home program and more sources of funding such as grants, scholarships, or a job.

Shop around for the best deal. FinAid.org is a good resource. So is SimpleTuition.com -- like a LendingTree.com for student loans, it has information on 32 lenders and 60 products.

Make doubly sure to exhaust federally guaranteed student loans before turning to private loans. This includes PLUS loans for parents and GradPLUS loans for graduate students.

"PLUS loans are available up to the cost of attendance for any family at an 8 percent interest rate," says Swarthout.

Have bad credit? Don't despair. If parents don't qualify for a PLUS loan because of mortgage or other problems, students are now eligible for an increase in Stafford loan borrowing for up to $46,000 a year. Stafford loan eligibility is based on the FAFSA form and does not rely on students' credit history.

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102 Comments

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  • Yahoo! Finance User - Tuesday, April 15, 2008, 12:06PM ET  Report Abuse

    • Overall: 4/5

    The people commenting are funny. Seems to me the basics of the article are that if you fill out your FAFSA and the EFC comes back at $0 then you don't have to worry, you'll get a loan. If it comes back and the government expects your family to kick in, the family better have cash on hand since it isn't as easy to get a loan these days. In which case cheaper schools would be an option vs small liberal arts schools of the month.

  • Amy Bivalent - Tuesday, April 15, 2008, 12:00PM ET  Report Abuse

    • Overall: 2/5

    My perspective, for what its worth... I'm getting my master's degree from a private (top 25) school. The quality of education merits the higher price tag, painful as it may be (and not because I want to work for some "prestigous" firm, but for the knowledge gained). But, I can't believe ANYONE is lending me money to finance that education at this point since I'm a full-time student and work minimally at internships (which may or not pay, depending on the particular employer and semester). I also think its a rediculous prospect that someone like myself with over ten years of work experience and no dependence on family or spouse for support would need one of those folks to co-sign for an education loan. Is there no sane middle ground? I shopped private student loans (before I left my high-paying corporate job to attend, of course) more intensely than I shopped for a mortgage lender and believe that will be to my advantage going forward if I use those funds wisely and minimally.

  • Yahoo! Finance User - Tuesday, April 15, 2008, 12:25AM ET  Report Abuse

    • Overall: 1/5

    The only thing ARSs have in common with a CDO and its brethren, is that they are securitized debt. These things are nasty. I'll give the short version. ARSs are long term "bonds" which yield just better than short term rates. Mostly corporations use them to park cash. They would do that because the ARS could be converted to cash in as short a time as 7 days. The holder would sell it at auction to another holder who wanted to park cash. While the issuer (ie the school loan agency), "paid" accrued interest for the amount of time each holder held the "bond". Everything goes along fine, until the auctions fail. Brokers and investment banks used to sponsor the auction for fees and charges. They also used to buy up parts of the ARS to keep the market moving. Well, they have quit that. The issue you keep out of your piece is that when an ARS fails at auction, its interest rate jumps. Some as high as 12-15%. That's why companies like BBBY are upset because their cash is tied up, but they are going to convert the ARS to a long term investment on their balance sheet. Great idea, great return. Swell, except that the not-for-profit Student Loan (read less expensive) agency has to accrue the high rate yield of the failed ARS. They run on razor thin margins. They could end up owing par value of the ARS in yield within 6 or 7 years, instead of the usual 30 yrs. There are at least $86B in federally secured loan ARSs. (of the total of $335B). This will shut them down in every state. Their federal grants for operating were already slashed to the bone 2 yrs ago. And I'm not sure where you have gotten your information, but the caps put on the federal guarantees will place them at historic lows based on population. And that doesn't even account for inflating tuition. This is a dream come true for the Big House Lenders and their lesser buddies. Look at their spread on mortgages, right now. And 8% is good when the funds and discount rate are at 2.50 and 2.25?????? And the debt is secured by a collateralized co-signer. That's 5 points spread with little risk. And what about the next 140,000 Pennsylvanians who want a break on a loan? You be sure to tell them there is no problem, while the line up with the private lenders and pay prime 1 or 2 or 3%.

  • Yahoo! Finance User - Sunday, April 13, 2008, 8:12PM ET  Report Abuse

    • Overall: 1/5

    I seem to always disagree with Anya. She did about a 20 minute interview on a show called stockshotz. Below is the web address. www.stockshotz.tv From what she said on that interview, it sounds like she believes that the government should provide handouts everywhere.

  • Mike - Sunday, April 13, 2008, 2:34PM ET  Report Abuse

    • Overall: 2/5

    Education may well be the next bubble. As an author of economics, I predict unprecedented unemployment for the educated sector as our economy continues to fail and the house of cards collapses. As companies jettison their heaviest baggage first...think about that student loan.

  • Roy - Sunday, April 13, 2008, 1:42PM ET  Report Abuse

    • Overall: 2/5

    to the previous commentor - you don't need to go to a private school to get a job with these factory line "management consulting" firms - like accenture, kpmg, pwc and others. they do a vast majority of their hiring from the big public schools. Also, the career lifetimes at these big firms tend to be short with no guarentees of bigger and better things down the road. Unless you go to a true IVY school (harvard, yale, princeton) or a GENIUNE equivelant such as stanford or MIT- no one cares where you got your degree from (sorry Duke, Rice Georgia Tech and so many other expensive wanna be's etc - you really don't make the cut). you are wasting your money sending little johnny to a non-ivy high priced private school. He'll do much better off in life going to the big public university with lots of alumni connections - bottom line, end of story.

  • Gary A - Sunday, April 13, 2008, 12:13PM ET  Report Abuse

    • Overall: 1/5

    Fewer people will be able to go to the expensive schools. My son went to Bentley and works for Accenture. I doubt if he would have landed that job without going to the private school. Just one more way for the rich kids to profit and the middle class kids to be on the outside.

  • Patrick - Saturday, April 12, 2008, 11:57PM ET  Report Abuse

    • Overall: 5/5

    Good article. It is important for investors to know what is really happening with the loan market. You can't make good financial choice if you don't know what's going on.

  • Yahoo! Finance User - Saturday, April 12, 2008, 7:01PM ET  Report Abuse

    • Overall: 2/5

    These government-subsidized low-rate loans lead to increased education costs for everyone. Cheap credit leads to inflation. Always has, always will.

  • __A_YAHOO_USER__ - Saturday, April 12, 2008, 1:05PM ET  Report Abuse

    • Overall: 1/5

    Yeah she does look kind of manly. She's also not very intelligent. I feel bad for her husband!!!

  • Yahoo! Finance User - Saturday, April 12, 2008, 10:00AM ET  Report Abuse

    • Overall: 1/5

    When multiple state-backed not-for-profit student loan foundations fail to auction their bonds, there is a crisis looming. Once the crisis truly hits, it will be too late.

  • stockshotzmedia - Saturday, April 12, 2008, 12:58AM ET  Report Abuse

    • Overall: 3/5

    Check out my interview with Anya posted on youtube. Follow this link http://youtube.com/watch?v=B8rxpG_GeGg.

  • Yahoo! Finance User - Friday, April 11, 2008, 1:28PM ET  Report Abuse

    • Overall: 1/5

    It's not as easy as she makes it seem to switch to Direct Lending and I don't agree with what the government is trying to do in trying to force lenders out of the FFELP program which in turn would force schools to go to direct lending (there used to be an advantage to the students in the FFELP program - there were incentives for making on-time payments and auto debit that the direct lending program never offered) Also, she confused her terms and facts...an unsubisidized loan IS a federal loan and students can not receive $46,000 a year, that's the max they can receive as an undergrad. Also the interest rate is only going down for the subsidized loans over the next few years but after it hits 3.4%, it is shooting back up to 6.8%. But I do see the up side to less alternative loans being on the market. I've had several students refuse to take out a federal loan because they were basically too lazy to complete a FAFSA. So instead they are paying between 11-20% for their loans...crazy!

  • Yahoo! Finance User - Friday, April 11, 2008, 10:03AM ET  Report Abuse

    • Overall: 1/5

    "Credit crisis spreading to student loan market" Monday, March 03, 2008 By David Cho and Maria Glod The Washington Post Not to mention many financial institutions are pulling out of this market (i.e. HSBC Bank USA, the M&T Bank Corporation, and the TCF Financial Corporation). All three banks are top 50 student loan originators.

  • Yahoo! Finance User - Friday, April 11, 2008, 8:57AM ET  Report Abuse

    • Overall: 4/5

    I do believe the credit crunch will spill over into the education sector, both in student loans, and school finances (public and private). The business of education depends on debt from local school bonds to financing a college education, all with the presumption that tax revenues go up and personal earnings will rise. The education business has been draining the retirement assets of the baby boomer generation and now demands to be fueled by debt or severly contract. It would be interesting to understand how sucessfully educational instituitions manage contraction without outright failure.

  • Jim - Friday, April 11, 2008, 7:53AM ET  Report Abuse

    • Overall: 1/5

    I read Anya's book. What a whine fest! To my knowledge, no one EVER grew up in a society he/she helped to create. Anya picks out quotes, and tries to put them together to create something. So much for a journalism degree from the Ivy League. And she is in debt herself. Maybe if she studied a real subject, and got a real job, she might have something to say. Generation Debt? No. Maybe Generation Wet behind The Ears. This generation wants to be on their own, yet they still expect Mommy & Daddy to support their dreams and aspirations. GROW UP! (My sincere apologies to our service men and women who are much more responsible than these uber whiners in college these days) Sua Sponte!

  • Yahoo! Finance User - Thursday, April 10, 2008, 11:35PM ET  Report Abuse

    • Overall: 3/5

    The majority of college students, this problem may be a blessing in disguise. Why saddle yourself with a huge student loan debt that you'll be paying off for the next twenty or thirty years? Don't do it. Here's some good advice: get a job, go to school part time if necessary, and take advantage of the state schools where the tuition is cheaper. Do anything and everything you can to get through school with the best grades possible and the least amount of debt.

  • Yahoo! Finance User - Thursday, April 10, 2008, 10:30PM ET  Report Abuse

    • Overall: 1/5

    Anya is out of touch with what most people do to get through school these days. Get A JOB! That is the only plausible way not to be a slave to student debt for twenty years. Any other financial advise is just wrong. And with there being few jobs for recent college graduates, schools should be pushing part time programs while students get real experience before attempting to land the dream job. It won't happen at age 22 for most people unless they or should I say their parents know somebody. It is all about who you know. Grow up Anya!

  • Yahoo! Finance User - Thursday, April 10, 2008, 9:24PM ET  Report Abuse

    • Overall: 1/5

    I think this article is fairly 3 stars but since last weeks article was worth negative stars I am going to balance it out myself. I remember when Yahoo would show you the actual point total and they ALWAYS would round up. 1-5 stars is really 2-4 stars because they spot the writer 1 star and round up.

  • ChrisL - Thursday, April 10, 2008, 7:38PM ET  Report Abuse

    • Overall: 1/5

    DO YOUR RESEARCH!! Lenders Drop Out of Student Loan Market By Marcy Gordon, AP Business Writer Lenders Take Federally Backed Student Loans Off Their Books, Government Scurries, Worries WASHINGTON (AP) -- Lenders are dropping out of the federally backed student loan business in droves, fleeing an environment squeezed of cash because of the credit crunch. The call for government action is getting louder, just as the pile of loan applications gets higher on the desks and kitchen tables of students headed to college next year. ADVERTISEMENT Forty-six student lenders have stopped making federally guaranteed student loans, either temporarily or permanently. Distress in the $330 billion market for auction-rate securities in recent months has rippled into the student loan market, and several states have suspended their college loan programs. The 46 lenders accounted for 12 percent of the federally backed student loan market, according to FinAid.org, a Web site focused on student lending. Companies including Washington Mutual Inc., Sovereign Bancorp Inc., College Loan Corp., CIT Group Inc., NorthStar Education Finance Inc., HSBC Bank USA and Zions Bancorp have stopped issuing federally guaranteed student loans in recent weeks. And state agencies in Iowa, Michigan, Montana and Pennsylvania have suspended college loan programs. The major federal student loan program is providing an estimated $50 billion in loans to 6.4 million students in the current academic year. Against the backdrop of the housing and financial market turmoil and the $30 billion federal rescue of stricken investment bank Bear Stearns Cos., politicians are making the case that access to education, like homeownership, is a vital social goal that deserves protection. "There is a growing concern in Congress," said Sarah Flanagan, vice president of government relations at the National Association of Independent Colleges and Universities. "We don't know if we're over the hump, or if this is going to be a crisis." This week, Rep. Paul Kanjorski, D-Pa., proposed legislation designed to pump money temporarily into the student loan market. Kanjorksi's bill would permit the 12 regional banks that make up the Federal Home Loan Bank system to invest their surplus funds in securities backed by student loans and to accept such securities as collateral. The banks also would be able to make money available to the banks and thrifts in their regions for student loans. Another House bill, sponsored by Rep. George Miller, D-Calif., was unanimously adopted Wednesday and sent to the House floor by the Education Committee, which he heads. It would give the Education Department temporary authority to buy up loans from student lenders to ensure their access to capital. In the Senate, Sen. Edward Kennedy, D-Mass., chairman of the committee dealing with education, has proposed similar legislation. Kanjorski, a key member of the House Financial Services Committee and 31 other lawmakers of both parties recently asked the Federal Reserve -- which orchestrated the Bear Stearns rescue -- to inject cash into the student loan market by using a special lending operation. But Fed Chairman Ben Bernanke responded in a letter that since a shaky student loan market doesn't threaten the financial system, it's not the central bank's job to steady it. No student has been unable to get a loan -- a fact pointed out by Education Department officials and some education experts. With some 2,000 lenders participating in the Federal Family Education Loan Program, other lenders have been able to jump in when affected lenders stopped making loans, they say.

  • Lewis - Thursday, April 10, 2008, 4:56PM ET  Report Abuse

    • Overall: 1/5

    Directly refuted by an article on Yahoo! Finance (2 days later) that essentially states that the credit crunch is devastating Student Loans... http://biz.yahoo.com/ap/080410/student_loan_squeeze.html

  • Yahoo! Finance User - Thursday, April 10, 2008, 4:33PM ET  Report Abuse

    • Overall: 2/5

    One sure way to decrease the amount of student loans or spending the parents retirement money, get a job. If you have time to get drunk, go on spring break to Cancun, or spend the summer at the beach, then you have time to make money instead of throwing it away. We have far too many college kids who refuse to get any kind of job until they graduate. College students have almost 6 months a year off yet have no time to do anything but be a leech. A student will get a better education from the workplace than the false reality given to them by their whacked out professors. A few years ago some loser wrote Dear Abby or Ann Landers moaning about how terrible it was that his single mother refused to get another job on top of the 2 she was already working so that he could stay in school. Get ready to get a job, cause only the stupidest parents are going to let you party your way through school when they get laid off and are eating dog food to survive.

  • Da Big Guy - Thursday, April 10, 2008, 3:54PM ET  Report Abuse

    • Overall: 3/5

    Fairly decent! Her article isn't that bad either!

  • Yahoo! Finance User - Thursday, April 10, 2008, 2:26PM ET  Report Abuse

    • Overall: 1/5

    Oh really? Tell that to the suckers holding ticker symbol FMD. Honestly, this chick should not be writing anything finance related.

  • Loopie Hoopie - Thursday, April 10, 2008, 1:23PM ET  Report Abuse

    • Overall: 1/5

    Anya is a communist, but pretty hot.

  • josed - Thursday, April 10, 2008, 10:14AM ET  Report Abuse

    • Overall: 3/5

    The increases in the cost of education are going up as fast or faster than health care. I think it is a good idea that some lenders are pulling out of the market. May be colleges will wake up to the fact that they need to control costs just like everyone else

  • georgeg - Thursday, April 10, 2008, 10:06AM ET  Report Abuse

    • Overall: 3/5

    Are you saying the MEDIA is lying. Maybe now you can do the research on what is going on in the MORTGAGE Market Place. They say they have increased loan limits but have changed all the guidelines to get a loan. 50 ways to leave your lover and 1000 to say no to a loan. Stay on the Lying Media.....maybe you will be able to change the world.

  • Dr Putts - Thursday, April 10, 2008, 9:53AM ET  Report Abuse

    • Overall: 1/5

    Sure sounds like a crunch in some sense. It will be interesting to see the long-term impact. Will college cost come down due to a shortage of funding? Can the gov't continue to garauntee everything? Will less people have an opportunity to get an education? Some much hinges on the lenght and severity of this current econmic issue.

  • Yahoo! Finance User - Thursday, April 10, 2008, 9:48AM ET  Report Abuse

    • Overall: 1/5

    There is no student loan credit crunch? Did you read your own article? It sounds exactly like a student loan credit crunch. Furthermore, what if there is another wave of writedowns coming? Can anyone say with certainty that the worst is over? I dont think so

  • Yahoo! Finance User - Thursday, April 10, 2008, 9:33AM ET  Report Abuse

    • Overall: 1/5

    anya, please wake up from fantasy land! http://tinyurl.com/4hxzcd

Showing comments 6-35 of 102<< PreviousNext >>

More from Anya Kamenetz

Read the Generation Debt Book

According to economics professor Laurence J. Kotlikoff, Generation Debt offers "a truly gripping account of how young Americans are being ground down by low wages, high taxes, huge student loans, sky-high housing prices, not to mention the impending retirement of their baby boomer parents." Generation Debt will inspire you to take charge of your financial future.

Read more from Anya Kamenetz here and here.

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