Like bees attacking an intruder in their hive, student loan lenders are rushing to keep the sub-prime mortgage crisis from infiltrating their industry.
Late last month, lobbyists for the student loan industry began coaxing Congress to pass legislation that would authorize the government to inject money into the student loan market, which has struggled to raise enough capital from wary investors who fear the spreading mortgage crisis.
To raise capital, or money, to provide future loans, lenders bundle loans into their portfolios and auction the interest to investors.
The housing crisis has brought a shortage of capital to the economy, and the $80 billion securities auction industry, the backbone of student lenders, is having trouble convincing enough investors to buy in.
Unstable auctions have prompted some lenders, such as the Iowa Student Loan Liquidity Corp. and the Michigan Higher Education Student Loan Authority, to predict their loan offerings will decrease this fall.
The Michigan group suspended loans to more than 100 schools in Michigan this month.
Sallie Mae, one of the nation's largest student lenders, has pitched a plan to Congress that would make the 12 well-financed banks in the federal home loan bank system inject cash into the industry by buying up student loans.
Craig Munier, director of the University of Nebraska-Lincoln's office of scholarships and financial aid, said he didn't favor Sallie Mae's plan but supported the idea of having the U.S. Education Department buy more loans from private lenders, a process that's already begun as lenders dump defaulted loans into the department.
Since the department is part of the government, it is better positioned to collect defaulted loans since it can withhold tax refunds if payments are not received, Munier said.
He said the student loan crunch would only affect students looking for private loans, not those dependent on federal loans such as Stafford or Perkins loans.
Munier described the housing crisis as a "cash shortage," and said it was brought on by banks who issued riskier loans and banks and home buyers who assumed housing prices would continue to increase.
Banks were confident prices would boom, so some became less demanding of 10 percent down payments and on-time payments because they assumed housing values would cover costs if a buyer was unable to keep paying for a house, Munier said.
That's exactly what's happening now, Munier said - people are walking away from their homes, but not because they can't afford them. But because decreasing house values have made homes worth less than the money loan buyers take out to pay for it.
Lincoln-based student lender, Nelnet, announced it would become more selective in its loan practices, suspend loan consolidation offerings and cut 300 jobs as a way to offset lower subsidy payments on loans from the government and the effects of the housing crisis.
Mike Dunlap, Nelnet's chief executive, said in a news release his company's diversified services and abundant cash reserves would give the company advantages over other lenders who are also riding out the loan crunch.
Dunlap did admit the housing crisis had caught him off guard.
"The ongoing turmoil in the credit markets is much worse than we anticipated and the duration of this disruption is unknown," he said.
Michael Dannenberg, director of the education policy program for the New America Foundation, a nonpartisan think tank investigating the student loan crunch, said the media had merged private student loans and federal student loans' susceptibility to the housing crisis, noting federal loan recipients won't be affected.
He scolded the press for creating a sense of fear.
"The bigger danger is that the fear, if not panic, could depress college access for students who think they can't get a loan," Dannenberg said.
Last month, Rep. George Miller of California and Sen. Edward Kennedy of Massachusetts coauthored a letter sent to Secretary of Education Margaret Spellings and urged the department to prepare for an unanticipated increase in demand for direct loans from the government.
kevinzelaya@dailynebraskan.com
