The Sub-Prime Mortgage Mess Threatens Student Loans
Tuesday, April 15, 2008PAUL KANGAS: The problems in the subprime mortgage market have spilled over into the student loan business. Without access to credit, lenders are pulling out of that market. Now, lawmakers are scrambling to address the issue. And as Stephanie Dhue reports, colleges and universities around the nation are worried about the impact on students.
STEPHANIE DHUE, NBR CORRESPONDENT: Trinity University in Washington, D.C., is preparing to welcome its largest freshman class in years. The majority of students here are low-income and rely heavily on federal student loans to pay tuition and living expenses. Trinity President Patricia McGuire told the Senate Banking Committee those students are at great risk in the credit crunch.
PATRICIA MCGUIRE, PRESIDENT, TRINITY UNIVERSITY: If there's any interruption of their ability to borrow, you know, the way they are borrowing right now, it could be devastating.
DHUE: The market for securities backed by student loans has dried up, and cuts in the federally guaranteed loan program make those loans unprofitable for lenders. Fifty-seven lenders have dropped out of the program, and 19 lenders have suspended private student loans. This has taken about $8 billion out of the $85 billion student loan market.
Sallie Mae is the largest student lender. CFO John Remondi says, without changes, loan demand will outstrip supply next school year.
JOHN REMONDI, CFO, SALLIE MAE: We can only lend to the extent of what we can borrow ourselves in the capital markets, and the situation as it's presenting itself today is one where our access to funding is severely limited.
DHUE: Political pressure is increasing to address the issue. Both Hillary Clinton and Barack Obama support expanding direct government student lending. Today, John McCain said students should not be denied an education because of reckless lending practices.
SEN. JOHN MCCAIN (R), ARIZONA: So, today, I propose that the Department of Education work with the governors to make sure that each state's guarantee agency has the means and manpower to meet its obligation as a lender of last resort for student loans.
DHUE: This week, the House will vote on legislation that would have the Department of Education guarantee loans. Senator Chris Dodd says that will take too long. He's urging the Treasury and the Federal Reserve to step in now to head off a potential crisis.
SEN. CHRISTOPHER DODD (D), CONNECTICUT: If the applications are up, you take out $8 billion already from that market, you don't have to have a Ph.D. in mathematics to know the kind of problems we're facing.
DHUE: The next four weeks are crunch time for college financial aid offices, as students make their plans for the fall. Key lawmakers are urging students not to panic, saying they'll ensure loans are available. Stephanie Dhue, Nightly Business Report, Washington.
