My student loan lender is now temporarily not funding loans. Is this now a common thing?
I am a Pennsylvania resident, and the Government agency, PHEAA was the lender through AES.
This is increasingly common and is related to the mortgage crisis.
The way a loan works is that a lender pays the bill up front with cash and then you pay that lender back over a period of time. This requires the lender to have cash on hand to give you a loan.
At a high level, what happened was that banks and lenders made a lot of bad business decisions and in doing so lost a lot of money. In order to provide you a loan these lenders have to have money on hand to first pay cash to your college or university. Then they take payments back from you, the person on whose behalf they paid bills for. However, because they don’t have cash left to make the up-front payments to schools they can’t take on any more loans. Which is exactly what you’re seeing.
On a deeper level what these lenders did was they allowed people with poor credit histories or low incomes to take our large mortgages. They did this because the value of homes kept increasing and so allowing more people to buy homes was considered a safe investment because of the fact that homes were an investment that kept increasing in value. As housing values quickly fell, however, and the economy slowed down many of these high risk individuals couldn’t pay their mortgages and they defaulted on their loans — the lender paid money to a bank so they lost that cash and now the person that was going to pay back the loan isn’t going to pay back the loan.
So these lenders have to quickly sell of the properties that they now own (because the family who had the mortgage defaulted) but while they’re trying to sell the market and home values are dropping, sometimes to below the amount that the lender originally lent out. There are tremendous losses from all of these defaulted loans and foreclosures — BILLIONS of dollars worth of losses. And as a result these lenders don’t have money left to be able to take on new loans and so many of them are pulling out of student loan programs.
