As you have probably heard, we are going through some rocky financial times. A “credit-crunch” fueled recession means that many financial institutions will have a harder time making ends meet, and this, of course, includes student loan companies, as the Washington Post points out today.

Higher education advocates are worried that these lenders are exaggerating the effects of the crisis on the student loan industry as a way to secure unneeded bailouts and get back some of the wasteful subsidies that Congress cut last year in order to increase student aid. They are also worried that all of the hype will mean debt-averse students may be discouraged from “investing” in a college education. Don’t worry – it is very unlikely that you won’t be able to get the loans you need to finance you education.

Here are a few points that the Washington Post story leaves out:

Nearly 50 student lenders, including some of the industry's biggest names, have stopped issuing federally guaranteed loans in recent weeks because of paralysis in the credit markets, confronting students with higher borrowing costs just as they are starting to apply for financial assistance for the coming school year.

While some large lenders have dropped out of the guaranteed loan program (FFEL), there are still over 2,000 lenders participating. It is not even clear whether having more lenders is really better, as folks over at Higher Ed Watch noted yesterday. Even if FFEL loans become a little more expensive on average, there is a federally defined cap on interest rates.

Some colleges are already saying that their students' expected financial needs for the fall semester are outstripping what lenders are willing to provide. The industry's downturn could mean that no loans are available for a fraction of students with bad credit histories or who are attending for-profit educational institutions with poor graduation rates. 

As Higher Ed Watch points out (can you tell I’m a fan?):

Despite some alarmist rhetoric in the news release accompanying the [National Association of Independent Colleges and Universities (NAICU)] report "about reductions in student loan availability," the survey confirms what we've been saying -- that there is absolutely no federal student loan crisis. Of the 315 private colleges that responded to the survey, not a single school reported having any trouble obtaining federal loans for their students.

Back to the WaPo story:

Lawmakers on Capitol Hill want to give the Education Department the authority to buy up federally backed loans from lenders, which could help thaw the frozen debt markets and rescue cash-strapped firms. Yesterday, the House Education Committee, which Miller chairs, approved such legislation with bipartisan support. A similar measure was introduced in the Senate last week.

This bill helps get us ready for an unlikely worst case scenario, and gives the few students who might be affected (students needing private loans with bad credit or attending schools with high default rates) more security by increasing borrowing limits for federal loans. For a good analysis of this bill, check out the letter that USSA & PIRG sent to the committee.