Credit Crunch Impacts Student Loans

On a day when the market reacted dramatically to the Bear Sterns buy out, student loan experts were talking about how the unstable economy is shaking the foundation of student loans.

Later this week Education Secretary Margaret Spellings will meet with Treasury Secretary Henry Paulson to address these concerns.

But yesterday in Boston Senator Ted Kennedy brought together experts in student loans to see whether the government is ready for a student loan crisis similar to the sub prime mortgage crisis. WBUR's Monica Brady-Myerov reports.

MONICA BRADY-MYEROV: Senator Ted Kennedy says since the federal government is helping the Bear Stearns buy out, it should be prepared to step in, if necessary, and prevent the collapse of the student loan market.

SENATOR TED KENNEDY: You need something more than just the plan you have to have the ability for the immediate implementation is what is absolutely essential that is what we want to have one on deck in place.

MONICA BRADY-MYEROV: There are signs the student lending industry is already in crisis. Thomas Graf head of the non-profit state agency Massachusetts Education Finance Authority says it's been unable to raise enough money to secure financing for all its loans.

THOMAS GRAF: There is little doubt the unprecedented disruption in the capital markets which began with the sub prime mortgage crisis, has impacted student loan lenders.

MONICA BRADY-MYEROV: Graf said the problems have created a broad and far reaching liquidity crisis. It's scaring many colleges whose students rely on private bank loans. In the past three weeks more than 60 colleges have dropped their relationships with private institutions and turned to the federal direct loan program. That means students can only borrow from the US Department of Education. Yesterday, Northeastern University became the second major school to switch. President Joseph Aoun says he did it to mitigate the potential impact of the current credit crisis.

JOSEPH AOUN: The market is very volatile now and we may see a situation is very similar in other lending situation and we are worried about that. This move to direct lending is stabilizing the volatility.

MONICA BRADY-MYEROV: The National Consumer Law Center says students and parents should have no problem accessing federal student loans. But Deanne Loonin, from the Center, says there may be some disruption in the availability of private financing particularly for the highest cost loans.

DEANNE LOONIN: A tighter market for private student loans should help pull aside the curtain and show that reality that in the long run expensive credit does not promote equal access to education.

MONICA BRADY-MYEROV: But expensive credit could compel more schools to follow Northeastern and join the federal direct loan program. That led Senator Kennedy to press Under Secretary of Education Sara Martinez Tucker on whether her agency is ready for an upswing in requests. Tucker says there's $10 billion dollars in unused student loan money and the department is ready to ramp up its program.

SARA MARTINEZ TUCKER: I want to reassure American families' parents and students that federal aid will be there for them in this coming school year.

MONICA BRADY-MYEROV: But others in the student loan industry question whether the federal government is ready to handle a major influx of schools that flee the instability of the private market to the guarantee of government loans.

For WBUR I'm Monica Brady-Myerov.