The Next Sub-Prime?

The combined cost of tuition, fees, and room and board have increased 31 percent in the last decade at private four-year colleges, while public four-year institutions have seen costs rise by 42 percent.

Such dramatic increases have placed enormous financial strain on those seeking a college degree. With the average cost of a private four-year college now topping $120,000, many students rely heavily on private student loans to bridge the funding gap between what federally-funded student loans cover and the costs of tuition in reaching their graduations.

Though still the smallest segment of the student loan market, private student loans have now grown to encompass more than 19 percent of all student loans, reaching volumes of $19 billion in 2005 and $17 billion in 2006.

Demand by institutional investors for securities backed by these loans helped feed the frenzy in lending to students. Student loan-back securities reached $16.6 billion in 2006.

But this year’s current economic crisis raises serious questions. If a recession were to occur, would recent college graduates, cash strapped and searching for jobs, and graduates already in the workforce, be able to keep up?

Signs of strain have already began to show with Sallie Mae – the largest private student loan player reporting a portfolio of $28 billion – reporting the charge-off amount in third quarter 2007 was double the amount from the third quarter of the previous year.

How banks and other private loan providers react to defaults, current and pending, will weigh heavily on this fast growing segment of the student loan collection market.