Royal Purple

Issue date: 10/8/08 Section: News

Media Credit: Alison Wisneski 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.

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.

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