Student Loans in Short Supply

Economic problems and financial sector problems aren't only affecting the job market. Students looking for college loans might be in for a surprise next year as many companies and lenders leave the business altogether. After Congress reduced subsidies and the subsequent profitability of the federal lending program, a wave of credit defaults threatened to freeze all liquidity and usher in a new era of corporate and municipal bond failures.

While the deflationary doomsday scenario has been averted by creative (and expensive) Federal Reserve actions, many banks and student lending companies are hesitant to get into a risky loan business at low interest rates and few safeguards against the every increasing risk that many of these graduates won't necessarily find jobs that can afford to pay back their student loans.

The typical response of an investor (lender) under these economic circumstances is to raise interest rates for risky borrowers - and this means getting out of the federal program and getting into more private loan offerings. The downside is this becomes a lot more expensive for the student, and family credit history may end up influencing costs and eligibility.

If student loans become scarce, colleges may face declining enrollment. The chain would then reduce budgets, and force the institutions into cost-cutting measures. Perhaps if rationing needs to take place, it might make sense for it to be aimed at the most academically focused college students rather than the most financially secure. The best way to achieve this is to let the student loan industry operate in a free market without federal supports, and allow private and public merit-based and need-based scholarships provide an outlet for students needing financial assistance.

Like housing, perhaps its time for tuition prices to come down a bit. We like to think that spending more means better results, but sometimes the economic cycle calls for a contraction and a re-evaluation of priorities. Is our priority to make college so expensive that most graduates have student loan debt for 20+ years? I don't think so.