August 14, 2008

Education Has Stopped Leading to Profits

For the banks, I mean.

Yearly tuition increases at universities are so routine that even the news of the increase is bland. A lot of students, however, will find this year more difficult than most. Trouble with the student loan market was originally reported last spring, but Wachovia recently added its name to the roster of banks that will not be considering student loans this year—along with other big names like GoldmanSachs and Bank of America.

The problem is that the Auction Rate Securities market (ARS) crashed in February, leaving banks without the money to secure the loans. I don’t understand all of the different factors that led to the collapse of this particular branch of Wall Street, but I do know it has something to do with questionable lending practices dating back to 2006, at least 4 of the biggest lenders in the country, and the fallout from the sub-prime mortgage crisis. I also know that the ARS bonds are what make student loans profitable for banks, since they can sell the loan to someone else at a profit.

Or could until last February when everyone stopped showing up to the auctions and the banks were left with 20% interest that they had to pay on all of their ARS holdings. While there are still a lot of details that still have to be worked out, there are going to be a number of students who were promised school loans this year that will not receive them. This is made even worse because many of the banks that still are supplying student loans will no longer do so based on home equity, one of the biggest pieces of collateral most parents use.

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