Congressman Paul Kanjorski has been in the forefront of efforts to repair the broken system for student loans. A side effect of what began as a sub prime mortgage meltdown money has been diverted from many different credit markets as investors got the jitters. Let's recap this issue a bit so it can be easily understood.
As Wall Street got more and more creative bundling and marketing mortgage securities more and more capital was attracted to these unregulated markets. Returns were very good and a flood of petro dollars and investors from places like China were looking for places to put their money. Since the hedge funds were making money hand over fist in these risky securities more and more money flowed into them and made more money available for credit.
More money available for credit meant loan originators got more and more creative about who qualified for these loans. They needed a market so they kept loaning the capital which was flowing into the loans. Since no one entity was actually responsible for the loan defaults because of the way they were packaged and sold everyone was willing to take the risk. Eventually the loans began defaulting and now everyone is affected. The ripple effect is hitting every loan market including student loans.
Those investors who readily provided the capital which fueled this credit expansion have taken their money elsewhere and there is less money available for loans. The consequence is that the requirements for loans is much tougher due to tighter markets.
Scores of student loan companies have gotten caught in the squeeze and are no longer providing college loans. This is serious for our economy for several reasons. First college educations are an important step forward on the economic ladder for young people. A college degree is worth a million dollars in earnings over a lifetime. College has become so expensive that few students can afford the education without incurring debt. Many local economies are dependent upon institutions of higher learning. Up to now living in a college town meant you were largely recession proof. No more if the student loan industry collapses.
One solution we're seeing are major universities dipping into their endowments to provide grants to lower income students. Harvard began this trend and has been followed by many others. Not every college has this capability however and if the student loan market isn't stabilized it could cause some institutions of higher learning to close. What the federal government is seeking to do is provide emergency funds for the market and act as a "lender of last resort." Another solution would be to restore funding for Pell grants to their pre-Bush Administration levels. George W. Bush has continuously cut funding for Pell grants.
Another important action needs to be cutting the interest rates on student loans. Once at low levels of 2-4% some students now pay upwards of 25-30% on their student loans. No one can pay off loans at those high rates. This won't help increase funds available for these loans but would have a lasting positive effect on the overall economy. College graduates saddled with such debt will never be able to buy houses for example.
This is one economic issue we have to address in addition to the mortgage crisis. Credit markets have been under attack from all sides and all are feeling the tidal wave of recession from the mortgage meltdown. It's imperative we solve these problems.