Capital sparse in some U.S. student loan markets
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.
The Montana Higher Education Student Assistance Corp. was unable to sell almost $400 million of bonds on the auction rate market last week, said Jim Stipcich, chief executive of the group's business manager, the Student Assistance Foundation.
"We're basically looking to restructure the auction debt ... This has to do with loans that have already been made," Stipcich said, adding that the Montana group did a financing in September that that will provide loan funding for 2008-2009.
The Michigan Higher Education Student Loan Authority said on Tuesday it was temporarily suspending one of its loan programs due to insufficient capital.
Fitch Ratings, a credit rating agency, said on Friday that the once highly stable market for student loan-backed securities "faces a number of significant challenges ahead."
Like mortgages and credit card debt, student loans are bundled and sold off as securities to investors. But issuance decreased 38 percent in the fourth quarter of 2007 from a year ago while funding costs rose, Fitch said.
Sallie Mae (SLM.N), the giant of student loans, securitized $5.1 billion in federally guaranteed loans in the fourth quarter, down 10 percent from the year-ago period, Fitch said.
On Friday, 21 members of Congress wrote to regulators asking for urgent help to stabilize the $85-billion student loan market. Appealing to Treasury Secretary Henry Paulson and Education Secretary Margaret Spellings, the lawmakers said some lenders face severe liquidity problems. Continued...
