Auction Failures Force Students to Lose College Funds

Bloomberg reports:

University of New Hampshire freshman David Jacobsen is running out of choices to pay for college.

The 18-year-old planned to obtain a government-backed loan of about $10,000 from a New Hampshire nonprofit group to pay the $32,000 tuition and expenses not covered by financial aid and a music scholarship, just like last year. That option evaporated when the New Hampshire Higher Education Assistance Foundation stopped making such loans in March.

``If I don't get the loans then I guess I really don't know what I would do,'' said Jacobsen, a double major in political science and piano performance from Kearny, New Jersey. ``My mom is not in a position to pay for it and neither is my family.''

The New Hampshire foundation is one of 45 state agencies, private lenders and nonprofit groups out of 2,000 nationwide to pull out of the U.S.-subsidized Federal Family Education Loan Program since December, eroding funding that accounted for about 60 percent of the $78 billion loans made to students and their parents in 2007, according to the New York-based College Board.

The squeeze means students and parents have fewer options to fund college educations, causing university financial-aid offices to try and update lists of active lenders and help students find less costly private loan alternatives, said Phillip Day, head of National Association of Student Financial Aid Administrators in Washington.

Financing Squeeze

The turmoil has its roots in the collapse of an obscure part of the bond market where rates are set at auctions typically conducted every seven, 28 or 35 days. After 20 years, Wall Street firms that ran the bidding suddenly stopped using their own capital in February to buy auction-rate bonds that went unsold because of concern about the creditworthiness of insurers that guaranteed the debt.

Auction securities backed by student loans made up about $86 billion of the $330 billion market at the start of the year, Moody's Investors Service says. No municipal bonds backed by student loans, including auction-rate debt, were sold in the first quarter, the first time that happened in almost 40 years, according to Thomson Financial.

A big story.