More on the student loan crisis
April 12th, 2008 by Brad FI wrote a bit about what is going on with the financing problems for Montana’s student loan provider MHESAC here, but after today’s news I thought I would go a bit deeper into what is going on.
The crux of the problem remains that student loan providers are unable to find liquidity, which in turn will affect their ability to finance new loans. The problem over liquidity is not unique to the student loan industry, it is a market-wide problem right now. More after the jump.
To put this otherwise mundane and boring topic into perspective, MHESAC, which handles 85% of the student loans for Montana, has issued $2.16 billion in debt to finance its loans; that sum is only a little less than the $2.6 billion budget for the entire State of Montana in the 2005 budget cycle.
On the student services end of things, the losses suffered by MHESAC will most likely result in a loss of perks such as free loan origination fees, subsidized debt consolidation, etc. All of this will mean the cost of college will go up just a little bit more.
Finally, it is important to remember what loans we are talking about here, these are FFELP, not private loans. Providers service these loans on behalf of the government so that the Federal Treasury is not on the hook for the over $50 billion in new loans each year. Part of the agreement is that the providers have to follow fairly strict rules and regulations set forth by Congress and the Treasury, more on how the College Cost Reduction Act last year changed those rules in a significant and detrimental way.
Congress is taking action in response to the new crisis. At first glance I think Representative George Miller’s proposal is an alright step. Unlike a lot of other market interactions, FFELP is a government program so Congress needs to make the program solvent. The one flaw from a market standpoint is the very last point regarding;
give the Secretary the temporary authority to purchase loans from lenders in the federal guaranteed loan program, if there was a determination that lenders and other existing policy options were unable to meet the demand for loans. This would ensure that lenders continue to have access to capital to originate new loans.
On a technical note the way this idea is structured is that lenders would sell loans carrying a yield of 8-9% in order to finance loans carrying a yield of the current market rate of 4-5%. Unless we have some very kind hearted people in the loan industry, it does not make a whole lot of sense to sell your good assets to create poorer ones.
A better solution in my mind would be to create a buying agreement where the Secretary will buy any loan created prior to say 2008. Lenders will not be restricted in how they use this new capital. The desired effect would be to buff up the asset sheets of the providers so they could seek short-term financing on the private market. Way back in the 1980’s a similar method was used successfully to shore up short-term credit. Worst case scenario is that the US Treasury will suck up a one-time liability of $54 billion in student loans in addition to the $10 or so billion already financed under the direct loan program.
Of course this whole credit situation could have been avoided last year if the Democrat Congress was not so gung-ho about punishing FFELP lenders. I remember Rehberg taking a little heat from the left over his vote. The effect of the College Cost Reduction Act was that the provider cuts made it almost impossible for lenders to continue to find financing. The idea of higher Pell Grant awards was a good one, but it never should have been done at the expense of cutting services to all other students who have loans. Call me pessimistic, but I doubt the press or Democrats will find the causation between actions last year and the current crisis facing students.
If you made it this far without falling asleep, congratulations, I have a tendency to care too much about the mundane. Someone has to follow the details though right?
