Monday, May 5, 2008
FOR FAMILIES with college-age children, it's a challenge scraping together enough cash to pay tuition. Parental savings go only so far: Two-thirds of students graduate in debt, with the average senior owing more than $19,000. Recently, the nationwide credit crunch has cast a shadow over student borrowing. About four dozen companies, representing 12 percent of the $68 billion market for federally guaranteed loans, have dropped out of the business, citing difficulties in reselling the debt as securities on secondary markets. Sallie Mae, the leading lender, has hinted that it may exit as well. Headlines warn of dire consequences for this summer's peak student borrowing season.
Actually, there is no cause for panic. Colleges and universities report no major problems with student loan access so far. Plenty of big players remain in the student loan business, such as JP Morgan Chase, which has said that it intends to expand student lending. The Education Department has taken steps to ensure that its direct lending program can fill the gap. The House of Representatives and the Senate have passed bills that would also allow the department to buy federally guaranteed loans from private lenders, a concept President Bush has endorsed.
Lenders that have dropped out of the market blame not only credit markets but also Congress. They argue that cuts in the dominant Federal Family Education Loan Program, which subsidizes private issuers of federally guaranteed student loans, have made it impossible for them to profit on loans made after Oct. 1, 2007. There is some truth to this, but the answer is not to restore the subsidies. A variety of studies have shown that direct lending by the government to students is more cost-effective than the federal program, which Congress created in 1994. Perhaps the real problem with the government-backed student loan business is that the federal government turned over most of it to private companies in the first place, without a compelling reason for doing so.