DEFAULTS ON student loans are creating ripples of anxiety about an organization known as the Student Loan Marketing Association, which finances them. It's a curious organization. It's privately owned, but it can borrow money at much lower interest rates than most private corporations because lenders think that, in a pinch, Congress would bail it out. They are probably right. When a similar operation, the Farm Credit System, got into trouble several years ago, Congress quickly ran to its rescue at a cost to the public that could ultimately run to a couple of billion dollars.
There are half a dozen of these hybrids -- government sponsored enterprises, they are called -- that borrow from the market and pass the money on to smaller borrowers whom Congress wants to help, like home buyers, or farmers, or college students. But, after the S&L bankruptcies, Congress has begun to look around nervously to see what other financial disasters might be creeping hungrily toward it.
The American economy rode through the 1980s on an enormous wave of borrowing, and the shakiness of that mountain of loans is now visible in many places. The sad story of the S&Ls is well known, and ditto the decline of the junk bond market. The troubles of the commercial banks are becoming a staple of the financial news. How about these obscure but huge government-sponsored enterprises?
At the moment, all of them, including the Student Loan Marketing Association, seem to be in reasonably good shape. But they have grown enormously during the past decade. One of them, the Federal National Mortgage Association -- Fannie Mae -- is, measured by its assets, the sixth largest corporation in the country. Borrowing on that scale is never free of risk, especially when the borrowers, like these corporations, operate with very little capital to absorb losses before they fall on the taxpayer.
It's time for preventive medicine. The Treasury makes two recommendations. First, these corporations need to increase their capital substantially. Their stockholders have to put up more money. Second, regulation is inadequate. Most are regulated by agencies that have an interest in heavy lending. For example, Fannie Mae is regulated by the Department of Housing and Urban Development. It would be a good deal safer to put the responsibility for financial regulation in the hands of a financial agency -- the Treasury or the Federal Reserve -- that has no political interest in pushing for more and bigger loans.
Tighter and more cautious regulation will inevitably mean somewhat fewer loans for good things like buying houses and paying tuition. But the dangers in the lending boom are getting pretty obvious. Trying to perpetuate it is asking for more trouble, S&L-style.