Monday, July 28, 2008

Student Lender in MA Stops Lending

There are a number of topics to discuss as it relates to this story in today's Boston Globe.

Student Lender Won't Have Loan Money This Season

The nonprofit lending authority said it was unable to secure funding to provide private student loans. It is contacting more than 40,000 students and families to whom it has made loans in the past, to urge them to seek other options.

"As a result of our problems and the continued dislocation of the capital markets, we have been unable to raise funds for the coming academic year,'' said Thomas M. Graf, executive director of the group."

With about a month to the start of the fall semester this news is clearly going to be a painful blow to the hopes of many college bound students and I understand the anxiety this is going to cause.

I think this a trend that is going to continue across numerous state and federal agencies as the credit crisis rolls through different markets.

This is clearly the cloud - here's the silver lining. College costs have been spiralling out of control for the better part of the past 20 years. A major contributing factor to this growth in the cost of education is the easy access to relatively cheap credit. Colleges have felt no need to innovate or control costs b/c every bump in tuition has been met by a 20% increase in applications. If the days of cheap credit are truly over, then perhaps the cost of tuition will eventually start to ease as the number of applicants fall.

On a related subject - There's a good business model to be had here. Continue to lend to students, but base the interest rate on the applicant's future prospects. For example, someone with a 2350 SAT that is going to MIT gets a rate of X%, while a D student with an undeclared major at Arizona State gets a rate of 2X%. The quality of the loan portfolio would be easily broken into tranches. Someone at Goldman should get to work on this model.

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