While the $700 billion bailout plan may seem esoteric to many Americans due to its complexity, the public can rest assured that it will be significantly affected after the House of Representatives voted 263-171 to approve the bill. In some ways the bailout plan could function as a double-edged sword because it provides short-term capital relief and thinly spreads the government’s finances.
So how did this problem come to fester? The root of the problem began with the sub-prime mortgage crisis in conjunction with the inflated housing market. Classified as borrowers with poor credit scores, sub-prime borrowers got caught in a position of financially overextending themselves by taking out adjustable-rate mortgage loans while betting that housing prices would continue to escalate. Lenders contributed to the problem by irresponsibly giving out these loans to individuals who would likely default if their adjustable rates increased and home prices dropped.
This worst-case scenario became a reality, causing a chain reaction as mortgage-based investments by various banks and investment corporations collapsed. The series of defaults led to hesitant investors, a mistrust by lenders and the current tight credit markets Congress is trying to fix.
The problems associated with a tight credit market aren’t isolated on Wall Street. In fact, students’ pockets will take a direct hit because access to student loans will only become more difficult. In early August, Wachovia, a major student loan lender, discontinued private, undergraduate student loans. With this decision, Wachovia followed in the footsteps of other major lenders, including Sallie Mae and Bank of America, a move that will heavily impact students in need of a loan.
The problem is amplified even more by the trend of increasing student tuition fees. According to 2007 College Board estimates, tuition at public four-year colleges rose to $6,185, a 6.6 percent increase from the previous year. Additionally, the average tuition of private colleges and two-year colleges is rising at similar rates, increasing by 6.3 percent and 4.2 percent, respectively. While the bailout plan allows these financial institutions to help out students, it should be noted that a significant percentage of student loans are distributed by the state and federal government.
However, with the bailout plan, the United State’s gross national debt is set to skyrocket and build upon its current $10 trillion level. When looked at as a whole, the money needed to pay off the national debt will have to come from somewhere. While it remains to be seen exactly how college students will be affected, their financial aid could be next on the chopping block. This lack of access to student loans could be problematic for American universities, who are already experiencing the pitfalls of the tight credit market. According to The New York Times, Wachovia prevented 1,000 colleges from accessing their investment funds containing $9.3 billion, which are used to cover payroll and other administrative costs.
On the state level, shored-up credit markets are also having a significant impact. On Oct. 2, California Governor Arnold Schwarzenegger asked U.S. Treasury Secretary Henry Paulson for a $7 billion loan as the state is mired in debt. The ramifications of California’s budget crisis on students, especially within the scope of the University of California system, may be quite harmful. With a $100 million UC budget deficit already in place, the possibility of further limiting financial aid to students may become a reality.
The culprits of the financial breakdown aren’t just the major institutions, but also average American citizens who displayed fiscal irresponsibility and a lack of accountability for their own finances. It’s no secret that Americans spend beyond their means.
According to the Federal Reserve, the consumer debt as of May 2008 was $2.57 trillion. Correspondingly, Americans are saving less, as noted by the U.S. Department of Commerce’s Bureau of Economic Analysis August 2008 report, which stated that the personal savings rate was a mere 1 percent. In this environment of excessive spending, Americans were living the high life on their way up and got caught with their pants down around their ankles.
Although the House decided to pass the bailout bill, it’s not as if it’s a magic cure to save the country. At its best, the bailout is merely a temporary bandage because it will only provide short-term relief and in the end is a lose-lose situation. Congress rushed through the bill to increase investor confidence and provide more liquidity to the credit market. Now that the emergency measure has passed, it’s time for Congress to reevaluate the bill and consider alternative measures.
As the famous saying goes, “There’s no such thing as a free lunch.”
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