By Shah Gilani
The costs of the ongoing credit crisis have been well chronicled. But there’s
a bright spot, too.
In a crushing blow to lobbyists, bankers, and loan intermediaries, the credit
crisis and the accompanying collapse of the securitization market may actually
force a top-to-bottom overhaul of this country’s much-maligned student loan
system.
If that happens, prospective student borrowers may no longer have to face a
lifetime of indentured financial servitude, and the U.S. higher education system
may finally get a long-overdue makeover.
When it comes to the ongoing financial crisis - of which the frozen credit
markets are a primary casualty - one of the only positives to date has been a
total bypassing of the bankers and loan facilitators that had been pushing
student loans for college and graduate-level studies. In the new era, the
federal government itself plans to take over the bulk of the lending duties.
While the prospect of fewer private lenders lowers the total pool of
available student loans, U.S. President Barack Obama’s new budget proposes to
fill the void by having the federal government take over most student lending.
The proposal is not a budget-buster, because the government already finances or
guarantees most student loans. A “Student Loan Bill of Rights” may even emerge
from this credit conflagration.
A Lot of Anger
From a financing standpoint, the greatest impact of the credit crisis has
been on the securitization market. Student loans are originated by private
bankers and government-sponsored intermediaries, and are packaged into “asset-backed securities.” The government guarantees repayment
of the underlying loans in many of the security pools.
Securitized student-loan pools are sold to investors and the proceeds of
those sales go back to the originators, who then have more money to make more
loans. The credit crisis brought the securitization markets to a complete
standstill.
The 2007-2008 school year was the most difficult year on record for student
borrowers. The Massachusetts
Educational Financing Authority was unable to meet loan commitments, forcing
32,000 students to seek alternate funding sources. Another non-profit lender,
the Michigan Higher Education Student Loan Authority, stopped making loans.
Major banks including: Bank of America Corp. (BAC).
