The current financial crisis has plagued Wall Street for more than a year with no clear end in sight. While much of the pain from the crisis has been centered in distant places like New York and London, a bit of a crunch is developing in Charlottesville too. Charlottesville? Really? Isn’t the largest bank here inside of Harris Teeter (wedged into an alcove across from the bakery section if you managed to miss it)? Unfortunately for students, the national and even international nature of banking and finance today means that what happens in major financial centers trickles down to people like us in the form of student loans, other debt and the interest rate the Benjamins linked to our debit cards earn.
Student loans used to be a pretty simple proposition. Fill out some paperwork, an application and go to class ... well, the last one is a bit ambitious, but the process as a whole is not too hard to figure out. This year things are a bit different. Three of the largest private student loan companies, subsidies of the Lehman Brothers, recently stopped lending, joining about 30 others that have closed their doors.
What does this mean? To flash back to Economics Prof. Kenneth Elzinga’s ECON 201 class, less supply + unchanged demand = not enough money in the cookie jar for everyone. Standards for privately provided student loans used to be very lax with minimal, if any, credit standards. Someone who would have previously qualified for a loan may not qualify any more. Essentially students need a co-signer on any loans to qualify and need to have a good credit score to top it off. This marked change from the past has the potential to alter the financial landscape for students who require student loans to make the ends meet for tuition and expenses.
Other types of loans have also been impacted by the crunch. Consumer loans for things like cars and other big purchases have faced much tighter standards for borrowers. Even the ubiquitous credit card has taken a hit. Banks are not handing them out like candy anymore. Junk mail credit card solicitations have dropped 19 percent in the past year and lenders are less inclined to take on applicants with sparse credit records. What does this mean for the student consumer? Loans for big-ticket items will need a co-signer or a hefty chunk of change in the bank to get approval.
On the other side of the interconnected financial world, interest rates on checking and savings accounts are extremely low. The Federal Reserve has been consistently lowering its target funds rate in an attempt to bring more liquidity to the credit market, which in turn forces the rates paid by banks on balances down. While low rates may be nice for people who qualify for debt, they are not good news for consumers with money in bank accounts. All four of the major banks that serve the Charlottesville area — Bank of America, Wachovia, BB&T and SunTrust — are paying an underwhelming 0.05 percent interest on checking accounts. That is pretty weak, considering that a balance of a few hundred dollars only generates pennies over an entire year, a money-losing proposition when inflation is taken into account. At that rate, your money is far more useful on the Corner than in any account.
Not all of the news is bad though. Once the controversy surrounding the government’s proposed bailout of the financial industry subsides and stability returns to the credit market, there is reason to see a glimmer of light at the end of the tunnel. Financing should become easier to come by or at least more stable and predictable. The impact of the bailout, however, and the countless possible benefits or repercussions it causes are anything but clear at this point. Excitable pundits are keen on promoting a number of outlandish scenarios that muddy the waters of the crisis and distort what is actually happening. They make fully understanding the situation nearly impossible.
Unfortunately for people who like to plan ahead or have something to look forward to, the debt world is a bit like the U.Va. football team right now, wandering aimlessly with questionable stewardship at the top.
Andrew Mueller is the chief financial officer of the McIntire Investment Institute, a student run equity investment fund. He can be reached at amueller@virginia.edu.
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