The Student Loan Crisis Is Not Over

By Richard Vedder

I have long said that students will be able to borrow money for college next fall, but the environment for borrowing may be less hospitable. Several new developments confirm that.

1. Several universities are pushing their students into the federal direct lending program. The federal government, which cannot begin to balance its own budget and is a model for fiscal irresponsibility rivaled only by a few Latin American Banana Repubics, should not be in the credit business --period. This is the wrong approach. Nonetheless, it is understandable that it is happening --it is the easy way out.

2. More lenders are "just saying no" to being mixed up in the federal student loan program. The feds have made such business at best marginally profitable (as a consequence of Congress trying to squeeze dollars to expand Pell Grants without cutting any government spending), so they are exiting. Today's Wall Street Journal reports that some big banks, such as HSBC Holdings, are exiting the business. While not huge participants, three in the top 50 lenders have exited recently, with more likely to follow.

3. Unsubsidized private loans will become more costly because of lender risks are higher than previously thought, and cautious lenders will demand, appropriately, higher risk premiums. Mediocre job prospects for students, a rising ratio of debt to future expected income, etc., all increase risks, and loans will be accordingly priced.

4. The Usual Suspects are clamoring for a federal bailout of student loan problems, beginning with Teddy Kennedy, whose answer for personal financial problems in his youth was to call Daddy, and more recently, no doubt to raid trust funds. Senator Kennedy never understood the meaning of scarcity, and never will. Putting him in charge of our youth's education (as chair of the Senate Education Committee) is only marginally saner than making Lorena Bobbitt the Surgeon General.