RIPPLE EFFECT

The credit crunch has now hit student loans.

Auction Failures Force Students to Lose College Funds (Update1)
By Adam L. Cataldo and Michael B. Marois
April 10 (Bloomberg)

...45 state agencies, private lenders and nonprofit groups out of 2,000 nationwide to pull out of the U.S.-subsidized Federal Family Education Loan Program since December, eroding funding that accounted for about 60 percent of the $78 billion loans made to students and their parents in 2007, according to the New York-based College Board.


The turmoil has its roots in the collapse of an obscure part of the bond market where rates are set at auctions typically conducted every seven, 28 or 35 days. After 20 years, Wall Street firms that ran the bidding suddenly stopped using their own capital in February to buy auction-rate bonds that went unsold because of concern about the creditworthiness of insurers that guaranteed the debt.

Auction securities backed by student loans made up about $86 billion of the $330 billion market at the start of the year, Moody's Investors Service says. No municipal bonds backed by student loans, including auction-rate debt, were sold in the first quarter, the first time that happened in almost 40 years, according to Thomson Financial.

Without the ability to finance, public authorities in Missouri, New Hampshire, Texas, Pennsylvania and Iowa have suspended or limited their origination of loans, according to an April 1 report from Zurich-based UBS AG.