Student Loans Pose a Challenge Amidst a Struggling Economy

The future of America resides in the youth that come into their own today and achieve their dreams so that they can apply themselves to a better tomorrow. Of course, this often means going to college and finding a study that is right for you, and then applying yourself diligently to that subject and then developing a career based on it. A perfectly fine idea in itself, but the process today can be quite a struggle, especially when one considers the degree to which the economy imposes tough situations on aspiring would-be students looking to get into college for the first time.

In recent history, loaners have tightened their standards considerably when it comes to potential debtors. The mortgage industry crisis has sent out shock waves that have caused a considerable impact on adjacent prospects, such as loans for all sorts of purchases and investments. Unfortunately, education was not spared, and it is pretty challenging for someone just starting out to try and find a good way to get into a promising school by means of securing a loan and using it to finance his or her tuition.

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Doing the student loan shuffle

For students heading to college this fall, getting financial aid will be a good lesson in money management. It may be tricky to find loans, and the landscape seems to change from one week to the next.

For many borrowers, private loans will be hard to get. That's because several of the nation's largest banks have either shut down or significantly reduced their private student loan programs.

Last April, The Education Resources Institute, or TERI, -- the nation's largest nonprofit student loan guarantor -- filed for Chapter 11 bankruptcy, pulling even more private lenders out of the student loan market for the upcoming 2008-2009 school year. According to the Project on Student Debt, a Washington, D.C.-based nonprofit agency dedicated to curbing student loan debt, that could mean "bye-bye loan" for the 8 percent of all undergraduate students currently relying on private loans to foot some, if not all, of their college expenses.

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Offers to Purchase or Exchange Commenced in Respect of $6 Billion of Brazos-Serviced Auction Rate Securities

The Brazos Higher Education Service Corporation, Inc. announced that Leon Higher Education Authority, Inc., a Texas non-profit corporation for which Brazos acts as master servicer, is making offers to purchase or exchange in respect of approximately $6 billion aggregate principal amount of student loan-backed securities, almost all of which are auction rate securities (the "existing notes"). Brazos acts as master servicer for the companies that have issued the existing notes that are the subject of the offers: Brazos Higher Education Authority, Inc., Brazos Student Finance Corporation, Academic Finance Corporation, Trinity Higher Education Authority, Inc., Educational Funding Services, Inc., Federated Student Finance Corporation and EdInvest Company. The offers are being made with respect to existing notes issued under thirteen separate indentures, each of which is secured by a specified pool of student loans (the "underlying loan assets").

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The credit crunch: Loans out of reach

Interest rate spreads. Libor. Collateralized debt obligations.

Unless you're fluent in the language of high finance, it's tough to make heads or tails of all the terms being tossed around in the headlines lately.

Simply put, the meltdown on Wall Street has made it tough for many Americans to get a loan to buy a home, purchase a car, start a business or even send a kid to college.

And with all the talk of a credit crunch -- some are even calling it a credit freeze -- it may get even tougher.

But instead of relying on arcane numbers to show that banks are more reluctant to lend to you and me, as well as to each other, we decided to speak to banking executives and have them explain how their lending standards have changed.

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Not all debts can be erased

As the economy continues to struggle, one indicator keeps rising nearly every month: bankruptcy filings.

Job losses, medical payments and other financial pressures have pushed an increasing number of Americans to the courts in search of protection from creditors.

Yet bankruptcy isn't a magical solution for many debt-burdened people. It won't give everyone the clean financial slate they envisioned

In addition, not all types of debts can be discharged in bankruptcy proceedings, which pose an obstacle for the thousands of Arizonans who have or will start the process this year. Some obligations, like child support, are designed to protect vulnerable parties. Tempe attorney Joe Volin said, "The ones that come up a lot are student loans, taxes, child support and alimony, along with criminal fines and restitution. More people seem to realize you can't get out of those things."

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Direct loans easy, safe

Getting a student loan wasn't as big of an ordeal as Matthew Draudt thought it would be.

"It was a little difficult," said Draudt, a freshman in aeronautical engineering. Other than the hassle of filling out the Free Application for Financial Student Aid, he said it was no problem getting the money he needed for tuition.

Ohio State has made it fairly easy for students to get loans without having to go to private lenders.

"In direct lending, the student works directly with the institution without a lender," said Michelle Wade, senior assistant director of SFA at the university's lending program. "The federal government provides the forms and money," she said.

Wade said that in the past, loan rates between the university and other lenders have been similar, but banks were allowed to offer students other benefits and incentives. New legislation now bans other lending institutions from offering these incentives to students.

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Mutual Funds And Personal Finance

Loans Are Available, But Harder To Get

Think the credit crisis, spawned by the implosion of mortgage-backed securities, means that home loans are out of reach? Think again.

You can still get a loan to buy a home or refinance an existing mortgage. But in some cases it's harder, and it's more difficult to qualify for the best interest rates.

There were 4.91 million home sales in August, according to the National Association of Realtors. "The overwhelming majority were financed by mortgages," said Lawrence Yun, chief economist for the NAR.

Lenders are also still refinancing existing loans.

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First Marblehead shares continue to slide

Shares of First Marblehead Corp. continued to slide as an analyst removed his "Sell" rating on the stock, but said the student-loan services provider faces a tough economic environment in which to restructure its flagging business and conserve cash.

Sandler O'Neill & Partners analyst Michael Taiano upgraded Boston-based First Marblehead's stock to "Hold," given that shares are trading in range of his $3.25 price target - an amount he said "approximates the amount of cash held on its balance sheet."

First Marblehead shares fell 15 cents, or 4.8 percent, to $2.96. The stock traded above $40 last fall, but has since lost most of its value as turmoil in credit markets has spread from mortgage lending to other areas such as the student loan market, which has seen rising defaults among student borrowers.

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Dion would boost student aid, research funding

Stéphane Dion unveiled his party’s post-secondary education platform today at the University of Western Ontario. The plan, if implemented, would see the largest new money investment in student financial aid since the creation of the Canadian Millennium Scholarship Foundation in the late 90s.

The plan will create over a billion dollars in new grants and shift some federal aid from tax credits to upfront grants. To fund the plan, the Liberals would create a $25 billion endowment, which is similar to the former scholarship and grant body, the Canadian Millennium Scholarship Foundation.

“We have to increase support for students to make sure university and college is accessible to all Canadians. The future productivity and economic success of Canada depends on the investments we make in research and development today,” said Dion.

The Liberals will create, upon full implementation in four years, new targeted grants for 300,000 post-secondary students. 200,000 will be solely needs-based bursaries of $3,500 a year and an additional 100,000 access grants worth $4,000 will be targeted to students from traditionally underrepresented groups such as Aboriginal students.

The Liberal will replace the current education and textbook federal tax credits with a series of grants to be paid to students at the same time as they receive GST tax credit cheques. Presently, students cannot take full advantage of the tax credits unless they earn $20,000 dollars a year. Most students make substantially less.

The new funding model will result in full-time students receiving $1000 cash each year when combined with their existing GST credits.

Student lobbying organizations are divided on the Liberal plan. The Canadian Alliance of Student Associations is pleased with the focus on the neediest students; the Canadian Federation of Students is disappointed that the Liberals are not focusing on cutting tuition fees.

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Will AIG plan cost taxpayers money, or just sleep?

American taxpayers awoke to learn they may end up owning one of the world's largest insurers. They might now lose some sleep wondering whether the government's $85 billion loan to American International Group Inc. was a wise investment.

If the gamble succeeds, the company nurses itself back to health, unhinged financial markets calm down and taxpayers turn a profit.

If it fails, the American public feels the hit — and possibly finds itself rescuing other major financial institutions, swelling the deficit and potentially driving up interest rates on mortgages, student loans and other debt.

Analysts said the odds are pretty high that the rescue will be a good investment for taxpayers, with AIG paying off the loan at a relatively high interest rate and the government potentially making money off its nearly 80 percent equity stake in the company.

In 1979, the U.S. guaranteed $1.2 billion worth of loans to the struggling automaker Chrysler. When the company rebounded four years later, the government reaped more than $300 million in profits.

While relatively unknown on Main Street, AIG is a colossus on Wall Street and financial districts around the globe, with operations in more than 130 countries and $1 trillion in assets on its balance sheet.

Besides life, property and other insurance offerings, AIG provides asset-management services and airplane leases. Its myriad businesses are also linked to mutual funds, annuities and other retirement products held by millions of ordinary Americans.

But perhaps the biggest concern about AIG is the dizzying array of complex financial instruments it structured for commercial banks, investment banks and hedge funds around the globe — many of which were directly or indirectly linked to the value of U.S. mortgages.

"AIG is in this mess because they got leveraged up to their eye balls," said Professor John Coffee of Columbia University Law School.

AIG is required to post capital as collateral to back the securities and derivatives it issues, and those requirements increase if its credit rating is downgraded, as happened on Monday night.

AIG "essentially became the insurer of the financial industry," said Barry Ritholtz, chief executive of FusionIQ, a research firm. "As we've seen, that turned out to be not such a great trade."

The company's staggering reach, combined with the speed with which it faltered, is what forced the government to intervene after private rescue attempts fell apart and pushed the company to the edge of bankruptcy.

"A failure was seen as having catastrophic implications. It met the threshold of too big and too intertwined to fail," said former Federal Reserve economist Brian Sack now at Macroeconomic Advisers.

Over the weekend, the government refused to pony up taxpayer money to rescue troubled investment bank Lehman Brothers. That was seen as drawing a line in the sand after the Fed financially backed JPMorgan's takeover of Bear Stearns and then the Bush administration seized control of mortgage finance companies Fannie Mae and Freddie Mac.

But that turned out to be wrong.

The government agreed to loan up to $85 billion to AIG over two years in exchange for the right to buy 79.9 percent of the company. The hope is that the money will give the company enough time to reorganize and sell assets to repay the loan.

The interest rate the government is charging AIG for the loan is high — 11.5 percent. Because the government can borrow money right now at around 3.4 percent, taxpayers stand to make a handsome profit if all goes well.

The government is first in line to be paid back on the loan, which is backed by the assets of the entire company.

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