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Credit Crunch Hits Student Loans

By Editorial Staff

February 12, 2008

The credit crunch is crunching another corner of the market: securities tied to student loans, according to the Wall Street Journal.

Auctions of these securities – which are bundled long-term student loans – have failed to generate interest by money-market investors.

The failure of these auctions is a further sign of extreme market stress, the Journal said.

SLM Corp., Educational Funding of the South, College Loan Corp., and Brazos Higher Education Service Corp. have all had auctions fail recently.

Their lending programs are financed in part by pooling together loans and using them as collateral for these securities, but the securities have interest rates that reset in auctions ever few weeks, similar to adjustable-rate mortgages.

A failed auction means that dealers can’t find anyone interested when the debt comes up for investors to bid on. The banks aren’t required to buy the debt themselves, and instead opt to stay on the sidelines when the auction fails.


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