When hedge funds start drooling, watch out

With a recession looming, the opportunities for investment are not what they were. With the financial sector dominating the US economy, when the credit market starts to dry up the economy quickly has soured. The recent string of foreclosures has dramatically dried up the credit market. Lenders are nervous about lending their money to a borrower who will default on the loan.

There are some types of loans, however, that are very hard to default on. Student loans, in particular, are a relatively easy target for collection as it is very difficult to discharge student loans through bankruptcy. Currently the private student loan industry is an $85 billion a year industry. Still, it’s an industry feeling the pinch from credit markets drying up.

57 education lenders have suspended their participation in federally guaranteed student loans, and 19 others have suspended their private student loan plans. And state agencies in Pennsylvania, Michigan, Montana and Texas are also bailing out of the student loan business.Sallie Mae, the largest education lender, announced last week that it’s getting out of the business of making consolidation loans in which students can wrap their college debt into one package.

Those exits haven’t yet affected loan availability, but the prospect of students dropping out of college because they can’t get financing is looming.

Still, there is hope for large hedge funds. They are hoping that as these loans become less attractive, they’ll be able to snatch them up at a discount. The hope is that their lobbying efforts for congressional action will revitalize those loans.

Congress is currently considering legislation which will allow the government to buy private loans from lenders. This would provide those hedge funds with a buyer for the loans they’d purchased at a discount and leave you and me paying the bill if they fall through.

This ability to not feel the financial ramifications from unwise lending was a significant contributer to the current mortgage crisis and wider economic woes. If we want to save student loans, we need to increase our funding of actual federally subsidized loans. Protecting the investments of the wealthy is significantly less important than making sure our youth get a quality education.