Student Loan Stress Reshapes Industry

[marmar]

from AP via AOL:



Student Loan Stress Reshapes Industry
By MARCY GORDON,AP
Posted: 2008-02-20 01:14:35

WASHINGTON (AP) - The supply of education loans is shrinking as credit tightens, creating an opportunity for Sallie Mae and some big banks to pick up market share as some lenders retrench. College-bound students are the ones who might get squeezed in the process.

Smaller lenders such as College Loan Corp. and Nelnet Inc. are being forced to scale back as their ability to sell packages of student loans to Wall Street and other investors is crimped. Sallie Mae, the nation's largest student lender, and investment banks, on the other hand, are well-financed and have more flexibility to keep the lending spigot open.

Even though the Federal Reserve has cut a key interest rate five times in recent months, the shakeout in the student-loan industry will make it more expensive for students to borrow money, assuming a reduced supply of funds.

Lower-income students will feel the brunt of it, college administrators say. Both federally guaranteed student loans and higher-priced private loans are being affected.

The entire student loan industry has been under pressure in recent months. Rising delinquencies last year applied the initial strain. The global credit crunch triggered by the collapse of high-risk mortgages aggravated the situation. And student-loan legislation that took effect in October cut about $20 billion in federal subsidies to lenders.

The latest squeeze on student lending is tied to trouble in the $330 billion market for auction-rate securities, about $80 billion of which is made up of bundles of student loans. Since some of these investments are backed by troubled bond insurers, investors have been particularly reluctant to buy these securities, straining the student lenders that sell them to raise cash.

"The potential for crisis occurs when the well-capitalized lenders and the banks cannot absorb all that (loan) volume," said Ben Kiser, a spokesman for Lincoln, Neb.-based Nelnet. ......(more)

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