Student Loans and the Credit Crunch - Total Bankruptcy
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How the Credit Crunch Affects Education Loans

In the recession, many families are less disposable income and savings, leading more students to turn to loans for their higher education needs.

Unfortunately for those receiving acceptance letters to colleges and universities, the latest area affected by tightening credit seems to be student loans.

Factors Leading to Student Loan Shortage

In some ways, the housing market's collapse acted as the first domino in an elaborate maze of dominoes standing on end: now, they're all collapsing. Here's a look at the steps leading up to the shortage of student loans.

  1. The federal government recently cut back on the subsidies given to those who offered student loans, meaning that student loans are less profitable for lenders than before.
  2. Tightened credit standards have led to increased borrowing costs and less available credit for lenders.
  3. A shaky credit market means that fewer investors are interested in purchasing student loans on the secondary market, which means lenders have more trouble turning a profit from student loans.
  4. Decreased investor demand for student loans means lenders can't sell as many student loans as before, and so pull out of the market (including federally-backed programs).
  5. Fewer federally-backed loans are offered, meaning that fewer students can access such loans.
  6. Some students are turning to private loans and other sources, which tend to have higher interest rates and can be more difficult to repay.

Bad News for Students and Families

Many economists and education experts have noted that this chain of events is cause for concern. Limited access to federally-backed loans could mean that some American students don't have a chance to pursue higher education, even if they've been accepted to college already. And, if students are forced to take out expensive private loans to pay for school, they could end up in more debt than they can handle.

Since the change to bankruptcy law took effect in 2005, most debtors have been unable to discharge student loan debt as part of a bankruptcy filing. And starting out on your own can be challenging enough without adding epic amounts of debt to the picture.

Good News from Congress

Luckily, there's still hope.

The Department of Education has estimated that seven million students will need about $68 billion in student loans this year. Considering that lenders comprising about 14% of the student loan market have reportedly stopped offering government-backed loans, it's a good thing Congress has taken steps to address the situation.

A bill called the Emergency Student Loan Market Liquidity Act recently passed the House of Representatives earlier this month, and an amended version was recently approved by the Senate. According to the Associated Press, President Bush has urged fast action on this bill to make sure students will have access to funding in the coming school year.

If the House approves the modified version and Bush signs it, the bill will allow the government to temporarily buy more student loans from lenders, thus increasing their profitability and encouraging increased lending as well as giving some students greater access to federal loans.

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