Today offers another update in the on-going student loan drama. The current situation is a sort of consequence of the excessive profit scandals from earlier in the decade, and the more recent freezing of credit and capital markets related to consumer debt. As these problems converged, the lenders are finding a need to drastically reduce risk and maximize returns. Since the Congressional reaction to the high profits was to put lower subsidies and interest rates on federally backed loans, this is forcing the student loan companies to rate schools and consider their track record of producing graduates who can afford to pay back their debts.

From a pure risk management point of view, this leads to a necessary calculus about tuition and returns. The cost of a specific college should be proportionate to the amount of money a student can expect to earn after completing the degree. It makes sense to attend Harvard or Yale if you can be reasonably sure that you’ll make more money than if you attended a different, lesser-known school.

Citibank has taken this line of thinking further and identified entire categories of colleges that return a poor salary relative to their costs, and the biggest losers are: community colleges, private for-profit colleges, and less traditional institutions.

Some lenders are indentifying specific schools to cut from their lending lists. This can’t be fun for the administrators, teachers, and students. Some students are currently being notified that the loans they’ve been using won’t be available next academic year, and the fallout could mean declining enrollment at targeted colleges as soon as 2008. Institutions with their own debt obligations may have a hard time meeting those costs without cutting other expenses, such as instructors, building expansion or renovation, etc…

The downward spiral of the economy seems to show no end. We would all like more money for college, or medicine, or public safety, or a cleaner world – but we’ve reached a point where more money in the system just causes prices to go up. Honestly, I don’t know a simple solution to the larger financial problem other than sucking it up and finding new ways to provide goods and services at cheaper costs. Fewer things can be bought with debt, so maybe instead of trying to save the student loan system we should be thinking of ways to send students to school while paying for it up front.