Congress Prepares for Student-Loan Crisis…While Declaring It Unlikely

How’s that for irony? The Chronicle of Higher Education is reporting on Congress’ latest foibles. The irony is that Congress contributed to the student-loan-crisis last fall by slashing the amount of money companies make on student loans - essentially stripping away most of the profit.

Three more banks have dropped out of the FFELP student loan program, according to the Wall Street Journal. Several companies have outright closed and many have had rounds of layoffs.

To quote the Chronicle of Higher Education:

Several months into a credit crunch that has led at least 20 lenders to leave the guaranteed-loan program or suspend their lending operations, lawmakers have begun to respond with a sense of urgency-even as they seek to reassure students and parents that a crisis is unlikely and that federal student loans will still be available this fall. In the end, though, there may be little that Congress can do to shore up the federal student-loan system, beyond pressuring other government entities, like the Education and Treasury Departments, to take action.
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But it was not until Pheaa, the largest of the state-based nonprofit loan agencies, announced that it was temporarily withdrawing from the federal student-loan market that Congress’s Democratic leaders really took notice.

Until then, only for-profit lenders had withdrawn completely from the federal program (although statebased lenders in Indiana, Missouri, and Iowa had announced in the previous weeks that they would stop making consolidation loans), and “most people were assuming that organizations as large and as strong as Pheaa could always find money to provide loans,” said Harris N. Miller, president of the Career College Association, which represents for-profit institutions.

After Pheaa’s announcement, “a lot of skeptics of the lenders’ arguments about student-lending liquidity problems … began to realize they were wrong,” he said.

Like many lenders that have exited the federally guaranteed loan program, Pheaa had relied on the asset backed securities market to finance its loans. That market has dried up in recent months, leaving some lenders without enough money to continue making student loans.