Why? The business models of these institutions are highly vulnerable to short-term capital-market variations, independent of true economic value of education.  The general seize-up in credit market has made it harder for student-lending institutions to raise money or refinance old lines of credit on terms that are favorable.  Also, many lenders’ profit margins were lessened last fall when Congress passed the College Cost Reduction Act.  Among other things, the new law reduced the subsidies student-loan institutions got on certain federally guaranteed loans. 

 A key number to watch in this market is the default rate on “private” student loans.  These are the loans students or their families seek after exhausting the borrowing limits for cheaper, federally guaranteed loans.  The volume of private student loans has mushroomed from almost nothing a decade ago to more than $17 billion in the 2006-2007 academic years.  Contrast that with federally guaranteed loans for the same period which totaled $59.6 billion.

 Last month Bank of America announced it was getting out of the education private loan market.  Nelnet’s portfolio includes on about 1% of this market and has no plans on writing anymore such loans.  Sallie Mae’s private loan losses last year were worse than expected, though it recently announced that part of it portfolio has improved.

 The private loan market problems are not just the institutions problem.  The issues trickle down to the students seeking these loans.  If fewer companies are competing in this market, and the market as a whole is now seen as risky, the result will surely mean higher lending rates on the private loans that students apply for to supplement their federal loans.  What’s more, is that even high interest rates may not attract new competitors to the industry.  Student loans generally do not have to be paid back until graduation or even later.  So any new entrant into the industry will have to face years of watching their portfolio swell with interest charges before any repayments even begin.  With the capital markets being what they are today, that does not make for an appealing business prospect for any new entrant into this industry. 

 The student loan market has not been getting much attention in the news, nor much sympathy as a result of the larger mortgage crisis that the country has been struggling through in recent times.  But if the education lending market shakeout makes it harder for college students to borrow next fall, expect some much tougher looks at what has gone wrong and how to fix it.

See Legalnut's page on Student Loans and Student Loan Consolidation

See Legalnut's page on the Rising Costs of Law School Tuition

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