This is a good question: if private lenders leave government-backed student -loan programs what kind of student borrowers will become more affected?

From the Inside Higher Ed:

The phrases “credit crunch” and “student loans” are blaring with increasing frequency from newspaper headlines and TV news broadcasts. With growing numbers of banks and other loan providers announcing layoffs or plans to leave or limit participation in the student loan market, it is clear that the general problems in the financial markets have created a credit crunch crisis for student loan providers. But is there a loan crisis for student borrowers themselves?

That depends in large part on what kind of loans — and what kind of students — you’re talking about. (read A Student Loan Credit Crunch — But for Whom? (Inside Higher Ed) )

From the Chronicle of Higher Education News Blog:

Washington — Three more large student-loan providers are pulling out of the government-subsidized loan program.

The difference this time is that all three of them are banks.

The Wall Street Journal is reporting that HSBC Bank USA, the M&T Bank Corporation, and the TCF Financial Corporation have all decided to stop offering federally guaranteed student loans following last year’s decision by Congress to cut lender subsidies by more than $20-billion over five years.

All three are among the program’s 50 largest lenders, together providing more than $560-million of the $119-billion in federally backed loans issued in the 2006 federal fiscal year, the Journal reported.

Several other lenders already have announced they are withdrawing from or reducing their participation in the federal loan program, prompting expressions of concern from colleges and some in Congress. Yet Education Secretary Margaret Spellings has given repeated assurances that hundreds of other lenders remain available to provide student-loan money.

The difference this time, however, is that the three lenders withdrawing from the program are all banks. Non bank lenders had been regarded as especially vulnerable to the combination of the subsidy cuts and the overall crisis in lending attributed to rising rates of mortgage defaults. Banks had been considered less vulnerable because they have their own customer deposits to draw upon as sources of cash.

Initial reaction appears to be falling along the lines already established, with the National Association of Student Financial Aid Administrators calling the banks’ departures a “major concern,” and an Education Department official telling the Journal that the three banks appeared to have been major sources of lending at very few colleges. —Paul Basken

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