Credit Woes Seep into Student Loan Market

The student loan market is feeling the pinch of the faltering credit market. Students still have access to loans for college, but it's costing them more to borrow. David Wessel, economics editor for The Wall Street Journal, talks to Steve Inskeep about what's in store for American students.

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STEVEN INSKEEP, host:

On Fridays we talk about your money, and today we'll talk about the money you borrow to go to school. The trouble in the credit markets is even seeping into the market for student loans. That's what we heard from David Wessel, economics editor at the Wall Street Journal.

Mr. DAVID WESSEL (Wall Street Journal): Well, it turns out that student loans seem to be like almost everything else in the financial markets these days. Loans were packaged into securities and sold to investors, and that part of the market isn't working very well. The result is some agencies that finance student loans - government agencies - are having trouble raising money. Others are warning that they're going to have to charge more for loans in the future.

INSKEEP: Wait a minute. Who is it that's making these student loans? It's not the government?

Mr. WESSEL: There's three kinds of student loans. There's direct loans made by the government. There's loans that are made by private entities, but the repayment is guaranteed by the government. And then there's loans made by private entities in which the government has no part.

Usually people who can get government loans, called direct loans, prefer them because they're a better deal. But there are some stiff ceilings on how much money you or your parents can make or how much money you can borrow. So if you need more money than that, you go into this private market.

INSKEEP: So people who may be reasonably well-off, but not so well-off that they can afford the tuition at Princeton or Harvard or any number of other colleges across the country, may be going to a bank or some other institution for a loan and now they're having trouble getting that loan?

Mr. WESSEL: That's right.

INSKEEP: And why would that be? Are there defaults among student loans in large numbers the way that there are, you know, among mortgages right now?

Mr. WESSEL: The problem isn't in defaults. The problem is that the subprime mortgage mess seems to have infected the rest of the credit markets. It's making investors and lenders wary across a variety of markets.

So there was this great innovation in the student loan business where you'd borrow money for a long time from somebody. And then that person would get the money by selling an unusual kind of securities. A little bit like you had a mortgage and each month you'd say to someone, would you like to be the person who's lending me money this month? It was called an auction rate securities market. It was used by a lot of municipalities, and it was used by people in the student loan business. And suddenly that market isn't working very well.

INSKEEP: Oh, this has also made news because major museums and other institutions get money the same way and they're having trouble borrowing.

Mr. WESSEL: Exactly.

INSKEEP: And the whole point here then is not that there's really a problem with student loan defaults, although of course there are some. It's just that people are afraid to get into this messy market.

Mr. WESSEL: That's right. I think there is a little concern about defaults. When the economy gets bad, more people have trouble making their loans. But a lot of these loans are government guaranteed. So the issue is not whether the students are going to pay them back; it's this business of how do you finance them.

INSKEEP: So does this mean that students who are applying for being accepted to college right now might have trouble paying for it in the fall?

Mr. WESSEL: Well, if you have to have a student loan problem, this is a good season to have one, because not very many people are borrowing right now. Most people have got their loans already. And existing loans don't seem to be affected in the most part by this.

I think that some students who have particularly spotty credit histories may run into trouble getting loans. But the main thing will be higher fees. Because the government has been cutting back on subsidies to these private lenders and because the private lenders are having trouble borrowing money, they're likely to charge more. And that's the primary effect.

INSKEEP: So you might still get the loan, but it's going to cost you even more to get into your college of your choice?

Mr. WESSEL: Exactly.

INSKEEP: David Wessel of the Wall Street Journal. Thanks.

Mr. WESSEL: You're welcome.

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