It’s unclear to me why the market for student loans has been dragged into the credit crunch. My guess is that investors don’t understand the myriad of government and private loan programs and just don’t want to touch any potentially poison asset-backed security.

There’s direct government lending, which is untouched by the credit crunch. There’s the Federal Family Education Loan Program or FFELP for students, PLUS loans for parents, and other private loans. Under the FFELP program, lenders have a near-guarantee they will be paid back. If a student defaults on the loan, the government pays back the lender 97% of the principle of the loan, plus interest. These loans have a low default rate. The lenders who make these loans say they are unprofitable in today’s market, and many have stopped making these loans.

Sallie Mae, which has support from several lawmakers, wants the Treasury to step in to buy securities backed by student loans. Some doubt the move is needed and believe the market will sort it out sooner, and more effectively, than the federal government. But with the political popularity of student loans, it seems clear that more federal assistance will be given to make sure students get their loans in the fall. But it may not be the “quick fix” that the lenders are hoping for.