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Nationally, about two of every three college students has a loan to pay for tuition and expenses. Many graduates with loans have told pollsters they are putting off important decisions, such as buying a house or having children, until they can retire the debt. Others (nearly one-third, according to one survey) have moved back with their parents. In addition, educators worry students will forgo rewarding but low-paying careers, because of this money crunch.

To me, what immediately jumps out, is the woeful lack of cash flow management learned, despite graduating from the best institutions of higher learning, even though, graduating, "cum laude" and "summa cum laude".

Public officials worry about the balance between the need to keep taxes low and the need to make higher education affordable.

It is true, someone needs to be worried, with an eye toward India, China and other emerging nations whose college graduation rates are climbing. But is it the role of government to fund education K through College. Apparently, presidential candidate, Barak Obama, thinks so. He has made such a program a plank of his campaign.

For now, in an attempt to ease the credit crunch, the major student loan lenders held an auction of student loan backed assets.

What happens if you hold an auction and nobody bids? Answer, you might not be able to afford to go to college! Here's what happened recently:

* Fitch, Moody's and S&P are the ratings agencies. Banks issue bonds (securities) and pay the ratings agencies a fee to give these securities AAA ratings.

* Ambac, MBIA, FGIC, and ACA are bond insurers. Banks buy bond insurance to guarantee that investors in their AAA rated bonds will always get paid, either by the bond issuer or by insurance.

Although, somewhat, arcane, you must understand what a CDO is. The subjective opinion of the value of a particular CDO determines if some entity wants to buy one, and consequently, if you can afford higher education.

CDO stands for Collateralized debt obligations. They are a form of credit derivative offering exposure to a large number of companies in a single instrument. This exposure is sold in slices of varying risk or subordination - each slice is known as a tranche.

A Need For Greed Was The Seed.

It's now turning out that the ratings agencies took fat fees from the banks to give AAA ratings to many, many CDOs and other bonds that are turning out to be near worthless. And it turns out that bond insurers took fat fees to insure many, many of these same bonds, and can't afford to pay off the insurance on them.

When the dominoes fall, they fall on you.

Now let's take a look at the domino effect that's going to keep many from going to college in the fall:

Step 1: Fitch downgrades some Ambac assets

On January 18, 2008, Fitch Ratings issued a press release saying that it was lowering the rating on many Ambac's assets (not the securities that Ambac insures, but the assets that Ambac owns for itself):

"The decision to downgrade the IFS rating by two notches, coupled with the continuation of the Negative Rating Watch, reflects the significant uncertainty with respect to the company's franchise, business model and strategic direction; uncertain capital markets and the impact of Ambac's recent decisions on future financial flexibility; the company's future capital strategy; ultimate loss levels in its insured portfolio; and the challenges in the financial guaranty market overall."

This could happen to any company these days, and it usually means that the company tried to make a lot of money by investing in mortgage-backed securities that were turned into near-worthless CDOs.

Step 2: Fitch downgrades some bonds insured by Ambac

Once Ambac's assets were downgraded, it meant that Ambac could no longer guarantee that it will be able to pay off on all its insurance policies.
CDOs insured by Ambac have been purchased by all kinds of organizations around the world. Many of those CDOs would have had BBB or CCC ratings without Ambac's insurance. But with Ambac's insurance, they received AAA ratings, since they're doubly protected: The bond investor would receive payment from the bond or payment from the insurance policy.

But if Ambac's ability to pay insurance was degraded, then the bonds insured by Ambac were degraded as well. And that's what happened.
On January 18, 2008, Fitch Ratings issued a second press release saying that it would downgrade the ratings on many "reinsurance transactions" insured by Ambac:

"Fitch Ratings downgrades 420 classes of asset-backed securities (ABS) Additionally, the ratings remain on Rating Watch Negative by Fitch. This action follows Fitch's downgrade of the ratings on Ambac Financial Group, Inc. and its affiliated entities (Ambac)."

The press release then included a very long list of downgraded contracts from many different types of organizations. It's quite a list, but here's a taste of the organizations affected: Ballantyne Re, Babcock & Brown Air Funding, Capital One Auto Finance Trust, Hertz Vehicle Financing, AmeriCredit Automobile.

The largest group of organizations on the list had names like: Access to Loans for Learning Student Loan Corp., Alaska Student Loan Corp., CollegeInvest, Connecticut Higher Education Supplemental Loan Authority, Michigan Higher Education Student Loan Authority.

In fact, there are similar names of student loan organizations from Maine, Iowa, Massachusetts, Missouri, New Jersey, North Dakota, Texas, Pennsylvania, Rhode Island, Utah, Ohio and Vermont.

And so, what's apparent is that a lot of student loans were in trouble.

Step 3: Student loan bond auctions fail

These student loan corporations do the same sorts of things student loans that mortgage lenders did with mortgage loans.

The student loan lenders bundled then together, divided them into tranches, and sold them to investors through auctions. Since they're sold through competitive bidding at auctions, and since the interest rate depends on the amount the bidder pays, they're called "auction-rate securities." With the money obtained from investors at these auctions, the lenders could then offer more student loans.

What happens if you give an auction and no one shows up? That's what happened when the lenders tried to auction off their student loan securities. In most cases, there were no bids. Nobody was willing to buy them.

And why would anyone want to buy them? They may turn out to be worthless. Fitch Ratings had just downgraded many of these securities (see Step 2 above), and there's no way to know how much to bid for them, since there's no way to know whether or not they'll turn out to be near-worthless.

And so, many student loan lenders have no way to sell off their old student loan securities, and so they have no way to get money for new student loans. That's how the 'credit crunch' works.

The short term consequences are being felt nationwide. Exemplary of the crisis are the situations in:

Michigan:

The state of Michigan has suspended one of its student loan programs indefinitely, shutting off one avenue for students to pay for college and raising troubling new concerns about the stability of the student loan industry nationwide.

Blaming a credit crunch rooted in the collapse of the sub-prime home loan market, Michigan will not offer new loans through MI-LOAN, a program created in 1990 to help bridge the gap between federally subsidized loans -- which are capped -- and the rising cost of tuition.

The suspension of MI-LOAN could be a sign of what's in store for other nonfederal student loan programs, commonly called private loans or alternative loans, financial experts say, and the fallout could narrow options for students seeking help.

Huge losses in the sub-prime loan industry have damaged the ratings of companies that offered bond insurance, which protect investors pumping millions into the bond market. Failed attempts elsewhere to sell investments this week foreshadowed to Michigan officials they would have difficulty selling bonds to generate the capital needed to make new loans.

On top of that, the government has cut subsidies to federal student lenders. The fear, some university leaders say, is that combined forces will put more lenders like MI-LOAN out of business, forcing students to turn to more high-priced ones.

The federal government puts annual caps on how much students can borrow from it each year, ranging from $3,500 for freshmen to $5,500 for seniors.

The problem is that the cost of education has skyrocketed. In Michigan alone, the average yearly cost of public university tuition and room and board is now about $15,400. And that's not including the cost of text books, transportation or other related expenses.

To fill the gap, students have turned in droves to private loans, which are commonly provided through banks, credit unions and state agencies. In 2005-06, students borrowed $17.3 billion in private loans, compared with $1.3 billion a decade earlier, according to the College Board.

"The emergence of the private loan industry is because the federal loans haven't kept up, and the best way to solve the problem isn't to prop up the private loan industry it's for the federal government to pay for loan levels that are adequate for students," said Mark Delorey, Western Michigan University director of financial aid.

One can only note with horror that Mr. Delorey's empty-headed comment comes from a man who's state is nearly bankrupt, has high taxes that drive away employers, creates high unemployment and high crime, all because government is not "propping up" private industry. Instead, Michigan, California, the failing economies of the rust belt and the Northeast, try to recreate the failed nanny state of the Soviet Union.

Michigan state leaders said they just didn't have access to the money to keep their program running.

Iowa reports:

The Iowa Student Loan Liquidity Corp. says it won't be able to properly fund loans for the 2008-2009 school year because of the nation's credit crunch.

Iowa Student Loan, a West Des Moines-based nonprofit lender, is the second-largest source of higher education funding for students in Iowa, providing funding help to more than 68,500 students. In the 2006-2007 academic year, it held approximately $350 million worth of loans. It's unclear how much could be available to students this fall. Some experts say that students and parents might be asked to have co-signers, higher credit scores or additional proof of income to secure their private loans.

Iowa Student Loans has asked banks in the state to keep student loans in their portfolios rather than attempting to resell them.

"We're working with our lenders to ensure there isn't a shortfall in Iowa even if national circumstances don't improve later this year," said Jack Wilkie, a spokesman.

New Hampshire:

Tara Payne of the New Hampshire Higher Education Assistance Foundation the leading student loan provider in the state said, ""At this point, we're still going strong -- providing the loans, still able to make those commitments -- but honestly, if something doesn't help us do that, either by the federal government or banks that step up, it will impact our ability to make loans come May or June."

Vermont:

In neighboring Vermont, the Vermont Student Assistance Corp., a nonprofit public agency that originates and guarantees student loans, says it has funds to keep making loans for the next few months but needs to raise $200 million in June and July for the next school year. In the meantime, the failed auction means that it will have to pay higher interest rates on $300 million in bonds it has already used for student loans.

Pennsylvania:

The acting chief of Pennsylvania’s student-loan agency told state legislators on Tuesday that his agency would temporarily stop making new loans through the federal guaranteed-student-loan program.

James L. Preston, acting president of the Pennsylvania Higher Education Assistance Agency, or Pheaa, said the agency had decided two weeks ago to suspend loans made outside the state, and now had decided also to suspend in-state loans, effective March 7.

Missouri:

The Missouri Higher Education Loan Authority (MOHELA), Missouri’s student loan agency, has suspended its loan consolidation and private lending services as the market for auction-rate securities backed by student loan debt continues to dry up. The changes could make it more difficult and expensive for Missouri students to finance their college educations.

Nebraska:

Nelnet Inc. (NNI), a Lincoln, Neb.-based lender, said it will stop offering new consolidation loans and will be "more selective" when originating other loans -- that is, it's tightening underwriting standards.

Texas:

In Texas, 'B On Time' Student-Loan Program Be Short of Money. A cash crunch has hit the popular student-loan program in Texas.

In Austin, Texas, the Credit Union Journal reported on January 11, that "with the specter of a soft lending market looming over loan originators in 2008, some credit unions are turning to lending software solutions to boost loan volume without adding additional staff." Translate that to mean non-human interpretation factors, like one's FICO score, will be more important than ever.

Utah:

The Deseret News reports that student debt in Utah is at an all-time high. The average student graduating with a $15,000 debt.

California:

San Diego.-based College Loan Corp., the eighth-largest student lender in the nation, recently said it will no longer offer federal student loans, focusing instead on the private market.

If the situation doesn't ease in coming months, student lending experts say, borrowers can expect:

* Higher loan costs.

* Fewer lenders, which could mean tens of thousands of college students scrambling at the last minute to find money.

* Tougher standards that could prevent some students from borrowing at all.

The easy-money blitz for students has been threatened on a variety of fronts:

Student loan defaults are up. The biggest student lender, Sallie Mae, reported a massive $1.6 billion loss last quarter, thanks in part to spiking default rates, and plans to set aside an additional $700 million to cover bad loans this year.

Although the U.S. government guarantees lenders will be reimbursed for federal student loans, the bulk of Sallie Mae's losses were from private student loans, which aren't guaranteed. This crisis isn't as bad as the one more than 10 years ago, when student loan default rates topped 20 percent (it's about 4 percent now).

As investors become increasingly spooked about the credit crunch and the rising risks that loans will go bad, they're avoiding buying bundles of loans, known as asset-backed securities, that are a major source of funding for some student lenders. This aversion applies even to federal student loans despite the government guarantee. Several recent auctions of federal student loan debt have failed, meaning that investors who hold the loans couldn't find any buyers. Without this critical source of funds, some lenders can't make loans.

Not all lenders get their money from investment markets.

SLM Corp., the biggest student-loan company, is poised to secure a new $31 billion line of credit extended by Bank of America and JPMorgan Chase.

Spokesman Tom Joyce says there's "no chance" current credit-market conditions will damage its ability to make loans this year. Even so, the company commonly known as Sallie Mae, struggling after years of stellar growth, has said it will tighten credit requirements for borrowers and emphasize making higher-interest private loans over those that are federally backed.

Sallie Mae currently charges interest rates ranging from 5.5 percent to 13 percent on private loans, depending on the borrowers' credit standing. Sallie Mae, recently eliminated its "nonstandard" private loan programs, about 3% of its $164 billion student-loan portfolio, aimed at borrowers with negative credit histories because a disproportionate number of the loans defaulted.

Even lenders that don't rely on the asset-backed-securities market are paying more for the money because of the credit crunch. Lenders will pass those costs along in higher fees and fewer discounts.

Some lenders have already cut back on federal student loans, and more may follow. Congress trimmed lenders' profits last year by reducing their federal subsidies by about $20 billion. That, combined with higher costs of funds, has persuaded some lenders to stop making certain federal loans or to concentrate on the private loan market. (Unlike federal loans, private loan rates aren't fixed and can range up to 19%. These loans grew in a single decade from less than 5% of the student loan market to more than 20%.)

Many lenders are becoming pickier about who gets money. Some lenders are signaling they may loan less, or nothing, to institutions that don't have a high graduation rate, such as for-profit and vocational schools. The notion here is pretty simple: Education works to boost your income only if you actually get a degree, and folks who fall short of that mark may not make enough to pay back the loans.

That means schools with relatively high dropout rates "are going to feel pinched."

That might save some people from racking up tens of thousands of dollars of debt they can't repay and can't shed (unlike many other unsecured debts, student loans typically can't be erased in bankruptcy court). But it may cost others "the opportunity to do something they've always wanted to do."

Another significant change has to do with credit scores. Federal student loan programs typically don't use credit information, but most private lenders in the past have required a minimum FICO credit score of 675, Walker said. (The traditional start of the subprime market, by contrast, is 620 on the 300-to-850 FICO scale.)

"Now they're tightening up lending criteria so that instead of 675, 695 will be the minimum.

In addition, lenders are likely to add fees that reflect borrowers' creditworthiness. Though people with the best credit scores might pay no fees, those with shakier credit could pay fees of 3% to 10% for a loan.

Three ways to cope

Clearly, it's a new world for student borrowers. So what's a college-bound student to do? Here's your game plan:

Don't procrastinate. As soon as you get your financial-aid letter in the mail, start investigating possible lenders. Remember to exhaust federal student loans before turning to the private market, since federal student loans have fixed rates and are more flexible than private loans.

Bug your financial-aid office for advice. Some aid officials got black eyes for steering students to certain lenders in exchange for kickbacks. But financial-aid offices are still the best place to go.

There's a link at this blog, for those registered, to go to a directory of more than sixty lender sources.

Get a co-signer. If you have to use private loans -- and many students do because the most you can borrow in federal loans for an undergraduate education is $23,000 ($46,000 if you're an independent student or a dependent student whose parents have been denied PLUS loans) -- burnish those credit scores or get a co-signer who already has. A co-signer with great credit can help you avoid fees and win a much better rate on your loans, which can save you thousands of dollars.

Experts said anyone planning to borrow should be sure to fill out the Free Application for Federal Student Loans.

And don't get me started on auto loans. Auto loan delinquencies have jumped to a 16-year high, according to the American Bankers Association (ABA). That delinquency rate is thought due to the growing stresses in the housing sector and because of more lenient underwriting standards which have existed.