NAICU Washington Update

House Committee Explores Loan Crisis, Views Secretary's Assurances Skeptically

The House Education and Labor Committee held a full committee hearing on March 7 to explore the ramifications for students and academic institutions of the current crisis in the financial markets.  Democrats and Republicans alike expressed concern that the Department of Education had yet to assess and prepare adequately for a credit crisis that could affect access to student loans.  

Chair George Miller (D-Calif.) began by querying  the department on its state of readiness, and warned of the consequences of students having to disrupt or discontinue their studies because they couldn't get student loans.  He asked Secretary of Education Margaret Spellings about the feasibility of schools converting from participation in the Federal Family Education Loan Program (FFELP) to participation in the Direct Loan Program (DLP), and what other options exist to ensure loan availability.

Rep. Buck McKeon (R-Calif.), the ranking minority member, continued in a similar vein by noting that he had heard from a number of schools, particularly the for-profit schools, that their students were having difficulty obtaining loans.  He added that the current credit shortage, when combined with cuts to lender subsidies made in the budget reconciliation of 2007, was creating a "perfect storm."

In her opening statement and throughout the hearing, Spellings assured the committee that students would be able to obtain federal student loans.  She cited a number of courses of action that would help counteract any "unlikely" shortage in the FFELP, including the department's capacity for integrating schools into the direct loan program.

She noted that the DLP currently makes 20 percent of the federal student loans, and said that amount could be easily doubled.  In addition, access to capital would not be a problem for the department, she said.  Several colleges and universities have already announced their intention to convert, or revert, to the DLP – most notably in recent weeks, Penn State.  Spellings reported that 850 schools have been certified by the department as DLP-eligible, and are "ready to go." She did not mention, however, that certification is just the first step in a conversion process that entails considerable work and training on the institution’s end.

Another option proposed by Spellings is use of the "lender of last resort" provision in the Higher Education Act, enabling guaranty agencies to make loans financed by the federal government.  This option is most often used to assist borrowers who cannot find lenders.  It was established in the late 1990s to cope with a financial crisis at the time, but was not designed for the current situation.  Spellings said she has spoken to the guarantors to see what would have to be done to make this operational.  A number of questions remain about how this provision would work, and how quickly it could be implemented.

The Secretary repeatedly claimed the department "would be ready,"  although at the present time, it was "monitoring the situation and "fact-finding."  She mentioned that as part of its effort, the department had sent letters to colleges and universities to get feedback about the situation in the field (60 had replied as of the hearing date), and that the department was conferring with guaranty agencies.  

Spellings said guarantors' plans to deal with a crisis are "uneven," and said she plans to talk to Treasury Secretary Paulson soon.  Larry Warden, the department’s chief financial officer, added that they are "following the stories in the newspaper," and are checking with schools whose lenders appear to be having trouble.  He said that, to date, loan originations appear to be similar to last year, though what happens in the “crunch time” of July and August will be crucial.

Spellings also opined that part of the crisis is a result of the increasing cost of a college education, and called for more transparency on college costs and more simplicity in applying for student aid, as described in the report from her Commission on Higher Education.

MORE News from NAICU