Capital sparse in some U.S. student loan markets

By Kevin Drawbaugh

WASHINGTON (Reuters) - Financing problems are spreading in the U.S. college student loan market, with groups in Iowa and Montana on Tuesday confirming funding complications after a Michigan aid authority disclosed problems last week.

Hit by fallout from the subprime mortgage crisis, the Iowa Student Loan Liquidity Corp has informed the state's colleges and universities that changes must be made in the usual student loan funding mechanism for the 2008-2009 school year.

Blaming "recent credit volatility in the national financial markets, triggered by problems with subprime mortgages," the Iowa group said area banks and credit unions were stepping in to help ensure Iowa students can borrow for college.

"We know that there may be a shortage of student loans this fall if financial markets do not turn around," said Steve McCullough, president of Iowa Student Loan, in a statement.

"We have asked our lender partners to join with us as we attempt to mitigate the impact of this potential shortage."

The group normally buys up student loans and resells them on the secondary market, but investor demand is thin, so lenders are being asked to hold more loans on their books.

A credit crunch that started last year with subprime mortgages is rippling outward to increasingly diverse pockets of the financial system, showing how everyday life in America is increasingly influenced by the vagaries of Wall Street.

Failures in recent weeks in the $330 billion auction rate market are posing problems not only in student loans, but also for local governments that raise money by issuing municipal bonds for hospitals, roads, schools and other vital projects.