Poor Economy Affecting Student Loan Programs
Bailout Plan To Help Student Loans
The bailout plan signed by President Bush in October will also help many lenders that have outstanding bad Student loans. While we hear a lot about the Mortgage crisis and the buyout of bad housing loans, few know that the bailout will also help lenders, both here and abroad, that are holding bad student loans.
Many in Washington believe that lumping a bailout of student loans is a sign that the Government will be bailing out other industries as well. Now that we see U.S. automakers begging for a “bailout”, it looks like those people were right.
Treasury Secretary Paulson stated that adding bad student loans and credit cards to the bailout plan was necessary so that they do not become victims of the widening credit crunch.
Student loans were being sold to investors by Wall Street firms just like home mortgages were. Student loans have already taken a hit earlier this year with the current credit crisis. In fact, many were surprised to find out that the student loan credit crisis was so bad that much of the private student loan market was dissappearing before their eyes. That forced the government to step in and beef up its direct student loan programs for college students.
But most analysts agree that the economic woes facing the Country is caused by one thing. Credit.
Many financial analysts feared that the credit card market would also become a victim on the credit crisis and end up like the housing and student loan market. Complicated “derivative” securities containing credit card debt are also packaged and sold to investors just like mortgages and student loans are. Now these complex credit card packages have become difficult or impossible to sell to investors in recent months.
Defaults on consumer loans are so high, that many Investors are shying away from complex derivative securites. This adds already to the increasing crisis because this reduces the value of individual loans and have made it hard to determine the value of pools of loans that back the securities.
A good example of how this affects businesses is Lehman Brothers. Lehman Brothers had many of the unwanted loans were sitting on their balance sheets. This forced them to declare losses and prevented them from issuing any more loans.
But many analyst believe this latest bailout of student loans will do little, if any good.
Many believe that financial institutions will continue to stockpile cash, raise credit standards and increase risk premiums on consumer and student loans. Which leads to fewer potential students being able to fund their education. This can have a long term affect on our economy as well as our national security.
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