Student Loan Market Faces Scarce Times

Major lenders, representing over 12% of the market, according to Associated Press Business Writer Marcy Gordon, have decided to stop issuing student loans, placing the availability of future loans in doubt.  Over 50 companies pulled out of the government subsidized loan program in the first four months of 2008 due to lower government subsidies and due to an increasing difficulty in selling the loans in the secondary investment markets.

The US government reduced the guaranteed subsidy rate by 5.5% in September 2007, causing some lenders to revoke their participation in the program.  Just months later, the number of lenders leaving the program swelled, due in part, to instability in the credit security markets.  Lenders fear they will not be able to sell the loans as financial assets to investors.  The student loan market is not satisfied making a loan and collecting interest on the repayment.  Lenders today need to realize a profit off the sale of the loan, and use the proceeds from that sale to perpetuate further loans.

As the economy slows, unemployed workers tend to return to school for training or to develop new skills.  The inability to obtain a student loan will hamper these plans, and likely leave students seeking more costly methods of financing.