Nonprofit Lenders Hurt by Legislation Intended to Help Them
Legislation that went into effect in October with the College Cost Reduction and Access Act cut federal subsidies to for-profit student loan lenders partly in an attempt to give nonprofit lenders a more competitive edge in the student loan market.
But as lenders continue to scale back or suspend their student loan programs amid a troubled economy and now-unprofitable federal education loans, newer legislation designed to help struggling lenders — nonprofit student loan providers in particular — may be doing more harm than good, writes Paul Basken in The Chronicle of Higher Education (“Federal Rescue Plan May Have Overlooked Nonprofit Lenders,” Aug. 1, 2008).
Government Positioned to Provide Lenders With Funds … But Only If Funds Are Already There
When it became clear that skittish investors, burned by the collapse of subprime credit markets, would no longer buy lender’s student loan portfolios in the secondary market, the government responded by passing the Ensuring Continued Access to Student Loans Act in May, allowing the Department of Education to purchase federal student loans from lenders or to use a lender’s student loan portfolio as collateral for a low-interest line of credit. Both provisions were intended to provide lenders with the needed capital to make new loans, which investors were no longer providing.
The continuing credit crunch, however, has hit nonprofit lenders so hard that they lack the liquidity to even begin issuing new student loans; without new loans, these lenders have nothing to sell or offer as collateral to the Education Department.
Peter Warren, executive vice president of the Education Finance Council, an association of nonprofit lenders, suggests that the recent legislation, by leaving nonprofit lenders still unable to bankroll federal student loans, has not done its job of shoring up the student loan market.
“You need to have access to funds in order to play in this game,” Warren says. “It’s essentially a Catch-22.”
Lower Interest Rates Cripple Lenders
Nonprofit lenders’ inability to secure capital has been even further aggravated by the recent drop in interest rates brought about by the subprime mortgage crisis, which has left student-loan lenders with a “negative subsidy” rate.
As Basken explains, lenders are now actually in the position of having to pay interest to the government on each unsubsidized student loan they issue, since the fixed 6.8-percent interest rate on these student loans is higher than current market rates. Meanwhile, lenders may not be receiving any corresponding principal or interest income from student loan borrowers, who aren’t required to make payments on these federal student loans while they’re in school at least half time.
These lenders, says Shelly Repp, general counsel for the National Council of Higher Education Loan Programs, simply “don’t have enough working capital to carry all the expenditures they’re expected to make.”
In response to the ongoing liquidity issues facing nonprofit lenders, lawmakers are pushing the federal government to come up with new solutions quickly, calling for a hearing next month to consider new options for student loan providers and asking President Bush to offer additional help to nonprofit lenders.