To the People

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Tuesday, March 25, 2008

The Coming Crisis in Student Loans

The private market in student loans has played a critical role in financing higher education for millions of Americans. For an undergraduate, the maximum federal loan is $3,500 per year. The private loan market made up the difference between the $3,500 and tuition, which could be $40K. With the private loan market dead, expect headlines in August about this issue.

Yet, in perfectly bad timing, Congress passed and Bush signed on 9/27/07 the ironically named College Cost Reduction Act.It took away subsidies for student loans generated by private lenders. The market reaction has been fierce and does not help students. The biggest lenders-- Sallie Mae, Wells Fargo et al-- have dropped out of the market completely. The DOE keeps repeating its mantra that 2,000 banks provide private student loans, (and I was surprised at the sloppy WSJ reporting that repeated that lie) but my interviews with actors in the sector say that it is closer to 30 and dropping quickly. The DOE counts every firm that ever registered and the leadership there is in spin mode about having a hand in the coming crisis that they caused. They are also trying to get new jobs before the administration changes hands so no one is focusing on anything except their resumes.

Mark my words: August will = headlines about the student loan crisis. The sad thing is that the government sees it coming but will do nothing about it.

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