Rise in student loan defaults causing jitters

WASHINGTON – Credit-market tremors – like the ones linked to the housing crisis – are beginning to show up in the $85 billion student-loan market.

So far, there is no apparent shortage of loans available to college-bound Americans. But analysts say rising defaults, coupled with a new law that cuts federal subsidies to student lenders, are beginning to strain the industry.

The rising defaults have surfaced amid falling home prices and rising foreclosures. In some cases, families whose home loans are resetting at dramatically higher rates may be having a harder time keeping up to date on auto- or student-loan payments.

Student lenders are under increasing pressure, too. Following a crackdown by New York Attorney General Andrew Cuomo, they have been forced to alter the way they do business. For example, they are no longer allowed to offer gifts or share revenue with college financial-aid officers.

It is against this backdrop that on Friday First Marblehead Corp.’s CEO cited “challenging times” as the company slashed its quarterly dividend to 12 cents a share from 27.5 cents a share, and said it would not bundle any more student loans for investors during the fourth quarter.

Meantime, reduced federal subsidies and anticipated lower profits have led a number of banks and other student lenders to scale back discounts to borrowers, such as reduced interest rates for having payments automatically debited from bank accounts.