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Wednesday, March 3, 2010

Are Student Loans Impacted By the Current Credit Crunch?

Unless you've been hibernating for the winter, you've probably noticed the financial markets are a huge mess. Specifically, the machinations of the mortgage market are spreading to other fields. The question is whether this affects student loans?

Although you might not think it, the financial fields are really tied together in many different ways. Think of it as a pie. Most of the cuts we are familiar with - home loans, auto, business loans - are actually tied together on the back end where we don't really see.

To this end, many of the financial companies that we think of as big retail options are just that - retail. They rarely will hold on to loans to administer the repayment process. Instead, they resell the loans to a secondary market of investors. These investors then administer the loan and reap the profits over time. Given the huge losses in the mortgage market, we've actually even seen a few of these companies as they declare monster losses. They range from Swiss Insurers to Merrill Lynch.

Ah, but what about student loans? Student loans are very certainly a financial product. Is there or will there be a credit crunch in this market that will make getting student loans a more difficult proposition? Well, the answer is a bit murky.

First and foremost, government loans should not be impacted in the least. The government has plenty of money from tax payers. It is happy to spend it. The amount allocated to student loan programs is not at risk. The government will not use it for some other purpose such as propping up the mortgage industry.

Private student loan providers, however, may be a different story. The problem here is we are talking about commercial lenders. These companies tend to be tied into the same financial providers as those in the other financial sectors. As such, money could be a bit tight given the credit crunch. Some believe, however, that there will actually be more money available for student loans. Investors need somewhere to park their money for solid gains. Student loans are hardly a bad place.

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