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The Student Loan Credit Crunch

Chris Farrell Feb 12, 2008

The signs were there that this was going to happen. I think this is more than just reverberations from the credit crunch. When it comes to student loans, the long boom is over.

Here are the opening paragraphs of today’s story in the Wall Street Journal:

Student-Loan Issues Under Stress
By LIZ RAPPAPORT and KAREN RICHARDSON
February 11, 2008; Page C1

Securities tied to student loans, another seemingly safe corner of the credit markets, are succumbing to the credit crunch.

Wall Street’s financial-engineering machine bundles together long-term student loans and uses them as collateral for short-term investments owned by money-market investors. Since Thursday, auctions of these securities conducted by Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Citigroup Inc. have failed to generate investors’ interest, leaving roughly $3 billion of such securities in a sort of limbo.

Under normal conditions, the banks would step in when investor demand is weak — just as a specialist on the New York Stock Exchange intervenes to keep trading liquid in a stock. Because big banks are already bloated with other kinds of loans and bonds they are trying to get rid of, they have been allowing the auctions to fail.

That, in turn, is pushing up interest rates for the securities and leaving them in the hands of investors who might have intended to get rid of them.

“Investors are seeking safety right now,” says Joe Lynagh, portfolio manager at T. Rowe Price who runs tax-exempt money-market and other short-term investments….

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