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How the Stock Market Crash and Government Bailout Will Affect Students

Nov 20, 2008 Jennifer Williamson, Distance Columnist | 0 Comments

Ask the experts, and they’ll say the current financial crisis was a long time in coming.  It started with the subprime mortgage crisis, when lenders routinely issued variable-rate mortgages to homeowners without confirming their ability to pay.  When interest rates rose and homeowners defaulted on their mortgages in record numbers, it had profound effects not only in the American mortgage market but also in the wider financial world. 

In a simplified explanation, the mortgage meltdown was the root cause of the financial crisis.  But the truth is more complex.  In reality, a combination of increased housing speculation leading to a housing bubble, high-risk lending practices, lax government regulation, the failures of several large lending firms as a result of risky lending, and a variety of other factors coincided in September of 2008 to cause a drastic drop in the stock market and forced many key financial institutions to their knees. The government responded by passing a $700 billion bailout bill intended to save financial institutions and keep the economy moving.

See Also: Online Degrees in Finance

Trouble for Parents and College Students


How will the government bailout affect college students?

It still too early to tell how the bailout will really impact the financial situation long term. In meantime students should be cautious about taking on any more debt and seeking the best terms for any college loans.


Parents and students have already seen the effects of the stock market crash in their college savings accounts.  Many parents invested in 529 plans that allowed them to accumulate tax-deductible savings and invest the funds in a mixture of stocks and bonds to promote growth. Depending on how aggressively the funds were invested, many college savings accounts were drastically damaged in September’s stock market crash.  This has a profound effect on students—from limiting their college choices to greatly increasing their debt burden after college.

After the trouble caused by risky lending practices in the past, lenders are tightening requirements for new loans.  Many students and recent graduates have large amounts of college debt and no credit record, making it difficult for them to secure loans in a more tightly restrictive environment.  The bailout money may make lenders a little more willing to offer loans to students—but it still won’t be as easy to secure funding as it was in decades past.

Initial Warning Signs

The larger financial meltdown was exacerbated by the downfall of the commercial paper market.  The commercial paper market provides a way for companies to borrow from one another to secure cash quickly for big initiatives—to build a new factory, start new product research, or fund the purchase of new equipment, for example.  Established companies often issue commercial paper to other companies because they have the cash and can profit from the interest.  All companies benefit, because borrowing in this way is less costly than borrowing from a bank.

In September, however, the market crashed to a halt.  In the wider economy, this could be catastrophic—it means that no company would be able to advance unless it had accumulated the capital to do so.  If a large company wants to open a new store, for example, it will have to wait years to accumulate the funds to do it rather than borrowing to do it sooner.  This affects economic progress, and it also affects jobs—new jobs won’t be produced as quickly, and companies will cut back on payroll to save for necessary investments. Potentially, the commercial paper crash could boost unemployment to catastrophic rates.

What the Bailout will "Hopefully" Accomplish

Part of the bailout is aimed at the commercial paper market, and it’s intended to alleviate these problems.  If it goes according to plan, a major drop in employment will be avoided.  The job market is still tough for recent grads, but the bailout will hopefully keep it from getting significantly worse.

It’s still a bit early to tell how the bailout will affect students in the long run.  Hopefully, it will keep the economic crisis from getting worse than it is—and lay the foundation for future prosperity.  As a potential student, your best bet is to avoid accumulating debt as much as possible—especially expensive private debt.  Look into ways to pay off your debt while in college, and you may be able to come out ahead when you graduate—no matter the economic situation.

Video: TheNewsRoom - Failed bailout could impact student loans



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