NAICU Washington Update

Will Housing Market Troubles Affect Student Loans?

With college aid offers out the door and on the tables of millions of American high school seniors, Washington has turned more and more attention to the question of whether the liquidity problems in the financial markets could affect student loans. Both the education and banking committees in Congress have put increasing pressure on the administration to develop a plan to ensure liquidity as more and more banks drop out of the student loan business. So far, colleges losing lenders have been able to find alternate sources of funding, and no one yet knows of any students unable to get loan funding. So, is this just a case of frantic banks, or is a real problem at hand?

Generally Speaking

One thing we know for sure is that lenders of all sorts have been exiting the federal loan programs - at least 60 to date - and limiting private student loan availability. In recent days, the rate of exiting seems to have grown. Some students at for-profit institutions already have experienced difficulties obtaining private, non-federal loans. Some lenders have announced they won't make loans to students at certain schools. Other lenders have declared that they won't take on small balance loans, especially at schools with high default rates - including many community colleges.

NAICU conducted a survey of its members in early March. At that time, respondents felt that access to Federal Family Educational Loan Program (FFELP) loans was not a problem. However, they were aware that some students were having a tougher time qualifying for private loans, and that available private loans were more expensive. (Survey results are on the NAICU Web site.)

Over a month later, though, with a number of big banks dropping out of the program, the situation has shifted a bit. Some colleges are scrambling to find willing lenders to put on their preferred lender list, or are have taken steps to convert to the Direct Loan Program. Effects of the freezing of capital markets, that began in the home mortgage sector in early 2007, have now spread to financial sectors involved in student and institutional lending.

Concern about these effects on federally-insured student loans initially centered on lenders and others involved in the providing FFELP loans. Increasingly, though, consternation is being expressed by state lending entities, the Department of Education, Congress, colleges, and the families of college students. Most recently, President Bush devoted his weekly radio address to the issue last Saturday, urging Congress to quickly pass legislation to stabilize the student-loan situation.

Congress Kicks Up the Pressure

The Senate Banking Committee, chaired by Sen. Christopher Dodd (D-Conn.), held a hearing on April 15, to shine the same spotlight on student loan liquidity that it earlier put on the housing credit crisis. NAICU vice president Sarah Flanagan testified about the importance of both federal and private loans for students at private colleges, as did Pat McGuire, president of Trinity Washington University. The hearing concluded with several senators declaring their intent to ensure sufficient liquidity for student loans this fall.

Following the hearing, Dodd wrote letters to both Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke, asking them to take steps to quell the growing concerns. Specifically, Dodd encouraged Paulson to consider using the Federal Financing Bank to provide liquidity. The idea, however, was rejected in a letter to Dodd from Paulson, Secretary of Education Spellings, and Jim Nussle, director of the Office of Management and Budget. Their position, as stated in the letter, is that the Department of Education could not purchase loans from lenders without new legislation.

Legislation Offered

Sen. Edward Kennedy (D-Mass.) and Rep. George Miller (D-Calif.), chairs of the Senate and House education committees, have introduced legislation to ensure the functioning of the FFELP. Miller's bill (H.R. 5715) was quickly approved by the House Education and Labor Committee and passed the House on April 24. As we go to print, the Senate is planning to fast-track Miller's bill with a few technical changes, ship it quickly back to the House for final approval, and get it to the president for his signature by later this week.

Both bills would authorize the Secretary of Education to buy federal loans from student loan lenders for greater liquidity, would expand the Secretary's authority under an HEA provision called Lender of Last Resort, and would provide modest increases to current student loan limits for certain students. The bills have some differences, though. For example, Kennedy's bill (S.2815) also would increase awards for the poorest Pell recipients.

Kennedy also has sent a letter to NAICU president David Warren, urging him to inform presidents that the Direct Loan program (DLP) is an alternative to FFELP, and that DLP will have capital for lending. A number of colleges have already begun the process for direct lending certification, in case they need to convert, since the changeover takes time. Colleges interested in this safety net should consider starting the conversion process sooner, rather than later.

In his letter, Kennedy also encourages colleges to take extra steps in counseling families about such federal options as the PLUS program, and asks colleges to notify Carmel Martin of his staff, at (202) 224-0767, if they know of students having difficulty obtaining loans.

Top