Credit Crisis Hits Our High Education Funding

It seems the credit crisis is really eroding individual's ability to access funding for student loans, especially in Missouri. So far 45 state agencies have pulled out of the U.S. subsidized Federal Family Education Loan Program since December. This funding avenue accounts for about 60% of the $78 billion loans made to students and their parents in an effort to help fund higher education. Without this ability to finance pools of loans authorities in Missouri, New Hampshire, Texas, Pennsylvania and Iowa have all but suspended or limited their origination of loans according to a report filed on April 1st!

What happened? It seems Wall Street firms stopped using their own funds to buy these auction-rate bonds when they went unsold because of concerns about creditworthiness of the guarantors of the debt. For the first time in almost 40 years NO municipal bonds backed by student loans were sold in the first quarter! NorthStar (a provider of student loans out of Minnesota) stated last week that it would no longer process applications for federally backed and ever popular Stafford, PLUS and Grad PLUS loans.

Student loan providers were enticed by auction rate securities because it allowed them to borrow long term debt (40 years) at short-term rates (4.83% in January). However, the market for these types of bonds has all but vanished and if you are able to secure or sell auction-rate money the Wall Street firms are requiring a much higher rate of return. With margins already very slim for these companies they simply cannot afford to pay the required prices established by today's market in light of the liquidity and credit crisis.

In an effort to help curb the growing issue U.S. Education Secretary told lawmakers last month that the Bush administration is prepared to step in to make direct loans to compensate for loss of lenders. It should be noted that financial packages just started going out to incoming freshman so no one will know for sure how many students will be left holding the baggage. One thing is for sure some students will be scrambling for necessary funding to attain their goal of higher education and in particular this could very well hit home in Columbia and The University of Missouri!

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