President Bush this week, signed the student loan rescue package
into law, just in time for the 2008 Student Loan Season. The law
will allow the Department of Education to purchase student loans
from lenders, there by injecting liquidity for lenders to make new
loans to students for college.
The liquidity problem was caused by a law passed last fall, called
the “College Cost Reduction and Access Act”, which mandated a
reduction in interest rates on student loans. This law had caused
a lower return-on-investment for the investor’s that usually buy
these loans as investment grade securities, thus providing money
to lenders to make new loans to students.
The law does not address the root of this problem…….which is the
interest rate at which the loans are purchased. Rick Vonk, head of
education lending for Key Bank said the law will not bring investors
and lenders back unless the Dept of Education buys them at prices
that return a profit !!!!
We will be keeping a close eye on the situation in comming months.
The US Senate Answers The Presidents Call On Wednesday
Wednesday, the US Senate answered President Bush’s call for quick action
on the student loan crisis brewing in the United States. The Senate’s vote
was unanimously approved, to “Temporarily” allow the Dept of Education
to buy student loans from lenders, on the secondary market, providing the
liquidity to lenders to make new loans for the upcomming school year.
The US House of Representatives had already passed their version before the
President made his plea for the Senate to action, last week.
President Bush is expected to sign the bill into law as soon as it reaches his desk.
Good news for students planning to submit loan applications this Fall.
Just to review this issue, Congress had caused this problem with legislation back
in September 2007, by passing legislation that reduced interest rate on student
loans, reducing the margin on these loans and causing investors to stop investing
because the Return-On-Investment became to low. These investors provided
the ”Liquidity” necesarry for lenders to make new loans.
This was a liquidity problem caused by Congress in the first place and its a perfect
example of why government has no place setting prices in a Free Market Economy.
Also, keep in mind that this new legislation will use Tax Payer Money to invest in
loans, putting the Risk Of Student Loan Default, in the pocket of the tax payers.
Graduates usually worry about how they will
pay back their studet loans, however; now
some have a different problem. The problem
that has arised is that they are paying back
too much. They are paying back too much
because the system is flawed right now.
