Uncle SAM May Soon Be Offering Student Loans
Wednesday, April 23, 2008SUSIE GHARIB: In Washington today, the Bush administration asked Congress for permission to act as a lender of last resort in the student loan market. The move is designed to make sure students have the money they need to go to college this fall. As Darren Gersh reports, the decision may be good news for those looking to finance their education, but it's not a good sign for the economy.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: As lender of last resort, the Federal government would buy up student loans that banks and finance companies can't bundle into securities and sell to investors. But there's a catch. KBW analyst Sameer Gokhale says the government plans to buy loans at the lender's cost.
SAMEER GOKHALE, SR. VP, KEEFE, BRUYETTE & WOODS: Which is better than making the loans and keeping them on the books at negative spread and losing money on them. So in that sense it's better to sell to the government at par, but it is clearly not a viable solution longer term and the government does seem to be trying to take a bigger role at least in the near term.
GERSH: With college planning in full swing for the fall semester, the Education Department urged Congress to pass legislation by the end of May authorizing it to buy a large number of loans. Congressman Paul Kanjorski says lawmakers will move quickly.
REP. PAUL KANJORSKI, (D) PENNSYLVANIA: We're going to lose 25 to 30 percent of our lenders in just the next several weeks if we don't solve this problem and possibly half a million to a million students will not go to school next year because there won't be funds available for them. That is unconscionable, unacceptable.
GERSH: Gokhale says the stress in the market for loans that are already guaranteed by the Federal government is a sign the credit crunch may be getting worse not better.
GOKHALE: I think what this suggests is for assets that are probably the next best thing to U.S. Treasuries, seeing the spreads widen out so much indicates that maybe there's a fear in the marketplace.
GERSH: That fear may be driven in part by concerns U.S. consumers are headed for more trouble. Morgan Stanley estimates the default rate for private student loans will rise from 1.5 percent in 2007 to between 3 and 4 percent in 2009. While the need is there, Tom Stanton, an expert in government finance, says the Federal government has to make sure it does not end up bailing out lenders.
TOM STANTON, FELLOW, JOHNS HOPKINS UNIVERSITY: They have to be careful they are not adversely selected, that people don't sell them their worst loans, the ones from trade schools with high default rates, the small loans and keep the best loans in their portfolio.
GERSH: Even with the government backstop, financial aid web site finaid.org projects an additional 100,000 to 200,000 families will not qualify for Federal loans this year because they have poor credit or have suffered through a recent foreclosure. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
