Student loan market suddenly tightens

First it was the mortgage market.  More recently it's been auto loans and credit cards.  Now comes the latest fallout of the debt crisis — student loans.

A hint of the trouble came earlier this week when the state of Michigan "temporarily suspended" one of its student loan programs. 

Deputy State Treasurer Tom Saxton said Wednesday the major problem
relates to an inability to issue long-term fixed-rate bonds in an
amount sufficient to fund the MI-LOAN program going forward.

temporary suspension of the program does not affect current loans or
ones that are finalized by Friday. But those looking to renew loans or
get new ones will have to look elsewhere unless the state reinstates
the program.

But this could be just the beginning:

"There is no question in my mind that, unless something changes in the
marketplace, there will be a shortfall of funds available to make
student loans," says Mark Valenti, president of the Connecticut Student
Loan Foundation, a nonprofit lender based in Rock Hill, Conn. "I've
been doing this since 1978, and I've never been more nervous."

The big crunch could come around springtime, when students start applying for loans for the fall.  And even when lenders themselves might not have trouble securing financing, they're getting more choosy about who they're lending to:

SLM Corp., the biggest student-loan company, is poised
to secure a new $31 billion line of credit. 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% to 13% on private
loans, depending on borrowers' credit standing.

Mr. Joyce adds that because Congress last year slashed
the subsidies made to lenders of federal loans, Sallie Mae and others
will have to scale back benefits they had previously offered to
students, such as breaks on fees and discounts for on-time payments.
"Unfortunately, there will be higher prices in the marketplace," he

And that includes interest rates a percentage point higher than has been the standard in recent years.

So now it's student loans.  What will be the next shoe to drop?

The Daily Reckoning