Sluggish economy affects student loans

The U.S. Treasury Department dramatically expanded its bailout plan to include buying student loans and any other “troubled” assets held by banks

Signed by President George W. Bush on Oct. 4, the “rescue plan” also opened the bailout program to foreign banks with extensive loan operations in the United States that potentially added tens of billions of dollars to the already $850 billion check.

Morgan Ellison, 19, a junior education student from Newark, N.J., said she is happy about the extra student funding but is skeptical about the overall economy.

“I guess I am glad that they added student loans,” she said. “But honestly I don’t know how to feel about the economy or the government. I think we are being played.”

Although student loans were not mentioned in the first debate between the Treasury and Congress, the issue was raised the second time around. A counterproposal by Senate Banking Committee Chairman Christopher J. Dodd, included mortgages which fell under the umbrella of consumer loans.

Conservatives cited the move as a sign that the massive plan to take over bad mortgage debt is already opening the door to further government bailouts.

Treasury Secretary Henry M. Paulson Jr. stressed that the additions were needed to ensure that student loans and credit cards – which have become indispensable to the spending habits and career plans of many Americans – do not become victims of the widening credit crunch.

Student loans, which Wall Street firms sold to investors just like mortgages, already were hit hard in the credit crisis earlier this year, as much of the private loan market disappearing. That forced the government to step in and beef up its direct loan programs for college students.

Jude Henry, 23, a senior physical education student from Ft. Myers said, “First off, it doesn’t make sense for students to have to borrow money to go to college anyway. The government should be paying for it.”

Henry mentioned that other well-developed countries send their citizens to school for free because they know when they graduate they will boost the national economy.

“The only thing they have to worry about half the time is scheduling their next vacation and mortgage,” Henry said. “Now we have to pay our education debt on top of someone else’s.”

The national debt is now $10.2 trillion with a contribution of $86,017 per family and an individual citizen’s debt of $33,555.

But most analysts agree that the economic woes boil down to one element- credit.

Many financial analysts feared that the credit card market would be the next domino in line to fall. Credit card debt also is packaged and sold to investors in complicated “derivative” securities that have become difficult or impossible to sell in recent months.

Investors are staying away from complex securities because they are worried about rising defaults in about every category of consumer loans, which reduce the value of individual loans and have made it hard to determine the value of pools of loans that back the securities.

In cases like Lehman Brothers and American International Group, many of the unwanted loans were sitting on the balance sheets of these companies, forcing them to take losses and preventing them from making further loans.

Essentially, credit is what makes the world go round; literally. Without it, companies cannot pay their employees and employees cannot contribute to the economy without money.

But some financial analysts are not sure whether the massive bailout plan will accomplish its goal of calming markets.

“The credit squeeze gripping the financial market won’t disappear soon as a result of this program. Financial institutions will continue to hoard cash, raise credit standards and increase risk premiums on loans,” said Bill Pratt of Young Money Magazine.