You may have seen the mention (and free link) to a front-page article in The Wall Street Journal on 2/11/2008 in Inside Higher Ed. The article mentioned investors retreating from the market for securities backed by investments bought with borrowed money - including student loans.

On Feb. 12, 2008, there was an article in the Journal (which was not flagged by Inside Higher Ed) specifically about student loans, entitled "Student-Loan Issues Under Stress." You can see a preview here.

The WSJ is one of only two online papers I know of (the other is our own Chronicle of Higher Education) that requires a paid (and relatively pricey) subscription in order to read full articles online.

Since I cannot send you the entire article or a link to it, I will give you my Reader’s Digest condensed version here in case you are not a subscriber.

1. Student loan issuers such as Sallie Mae finance their lending programs in part by bundling together long-term student loans and using them as collateral for short-term investments owned by money-market investors.
    
2. Student loans are usually backed by FFELP. The securities they are pooled to create are called student-loan-backed-auction-rate securities, or SLARS. While - as you know - student loans and their interest rates live for decades, SLARS have interest rates that are adjusted at auction regularly, similar to adjustable-rate mortgages. SLARS make up roughly 25% of the total market for auction-based-securities.
    
3. In the last week, $3 billion worth of SLARS have failed to sell at auction. Normally, banks would sweep them up but banks are currently stuck with too many other stinky investments. Banks allowing the auctions to fail is pushing up interest rates, leaving the owners of SLARS stuck. Interest rates in the auction-based securities market overall have risen from 3 to 5% recently.

What does this mean for you and your institution? Rising interest rates on SLARS mean higher borrowing costs for lenders, which of course will devolve to students. The other thing it means is that when banks tell you there will be capital available for student loans, that may be wishful thinking.

Best regards,

Jim Day