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Sophomore Nick Luchsinger reaches into his wallet to deposit a check at the UW-Whitewater Credit Union Tuesday on his way to class. The current economic crisis could mean trouble for students looking for financial aid.

Poor economy hits students' pockets

By: Amber Benson

Posted: 10/8/08

Many students may be affected by the faltering economy and crisis on Wall Street when trying to apply for school loans due to the lack of liquidity in financial markets.

Yamin Ahmad, assistant professor of economics, said the credit markets are frozen, making it difficult for banks to get money to lend. It will affect students in terms of student loans, credit cards and other types of financing.

"If it's hard to get a hold of money, the price of money will go up, so interest rates will go up," Ahmad said.

Ahmad said the economic situation resulted from different reasons. Housing foreclosures and unstable housing markets contributed to several big banks failing recently, resulting in uncertainties in financial markets about the assets they posses, specifically mortgage-backed securities.

"If you're a bank who is holding mortgage-backed securities, the value of assets is dropping as the market has gone away, because there's no market for trading," Ahmad said. "That's what the rescue package is trying to do. It's trying to create a market again, and hopefully the assets will gain value over time."

Russell Kashian, associate professor of economics, said there may be a time lag between students being awarded financial loans and when the money will be available.

Banks providing funds on behalf of Sallie Mae (a company who provides the largest amount of funding to American college students, according to its Web site) don't have the cash to do the loans.

"First of all, it's a matter of simply finding the money," Kashian said. "Second, interest rates will go up, because now you have people bidding against each other. It's kind of like bidding on Beanie Babies ten years ago."

Kashian said in order for banks to come up with multiple funds, they have to come up with cash. Banks sell bonds to raise cash, and no one is buying bonds right now. The $700 billion rescue plan will be used to buy bad mortgage debt, which will ultimately free up the cash banks need to lend.

Kashian said politicians are debating about how much the debt is worth, as well as who will make that determination and ensure buyers are not overpaying. The government is stepping in to create a market by buying bonds, thus giving the banks cash to ultimately lend.

"It's kind of like being on 'Let's Make a Deal,'" Kashian said. "Do you want $100 or box number two? We don't know what's in box number two. "These bonds are probably good, but we don't know what's in the box. The banks say they'll take the $100, the government says it'll buy the box."

Kashian said the bonds will have value eventually, because only a portion of houses are foreclosed on or going into default.

Until the economy changes, businesses will have a challenge getting loans to operate, Kashian said. Businesses relying on college students for labor may find it increasingly difficult to obtain or afford operating lines of credit, resulting in some job losses to cut costs.

"There's the question of where to get the money to pay the payroll and where's the money going to come from to get the inventory," Stuart Glosser, associate professor of economics, said. "If you can't borrow short-term, it becomes harder to acquire the inventories or meet the payroll."

Kashian said Whitewater's economy is doing well.

"We're fortunate that the businesses in town are fairly stable, the university is stable, and most of the businesses in the industrial park are in good shape," Kashian said.

Kashian said the economic department intends to have a forum on the economy within six weeks with speakers from the government, Federal Reserve System and industries.