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No, Student Borrowers Don’t Need to Worry About Loan Market Turmoil

Sep. 29, 2015 New York Times

Turmoil in a financial market has caused some speculation that college students will face higher rates on federal loans — or see them dry up completely. Are student borrowers at risk?

In short, no. But a fuller answer requires a brief history of how Wall Street has an impact on student loans.

Until 2010, banks provided capital for federal student loans, through the Federal Family Education Loan (F.F.E.L.) program. The government set the terms and guaranteed the loans, while banks put up the dollars.

After students received their money, banks frequently packaged similar loans and sold them in a secondary market, a process known as securitization. There is a similar secondary market for mortgages; these became big news during the economic meltdown in 2007 that preceded the Great Recession.

Investors happily snapped up student loans in the secondary market, in part because they were guaranteed by the federal government. If a student borrower defaulted, Uncle Sam was on the hook to pay off the loan.

Securitization is generally considered good for the economy because it gives banks ready cash, what economists call liquidity, to make more loans. There are potential downsides, however: In both the mortgage and student-loan markets, some struggling borrowers have had difficulty determining who owns their loan and has authority to modify its terms.

In 2010, the Health Care and Education Reconciliation Act ousted banks from the federal student loan program. This legislation was, in part, a response to a liquidity crisis in the student-loan market. As a consequence of the global financial crisis, capital dried up and lenders lacked cash to make new student loans. Students in several states faced delays and uncertainty as lenders struggled to find capital. The federal government finally stepped in with an injection of liquidity to get the market moving again.

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