Student Loan Blog : Ensuring Continued Access to Student Loans Act

Student Loan Providers May Get Government Help for One More Year

Student Loan Girl — Thu, 18 Sep 2008 00:08:00 GMT

With problems in the credit markets continuing to plague student loan providers, the U.S. House of Representatives overwhelmingly approved a year-long extension of the Ensuring Continued Access to Student Loans Act, which allows the secretary of education to buy student loans from cash-strapped lenders.

If approved by the Senate, the measure, which Congress originally passed last spring, would extend the education secretary’s loan purchasing power through July 1, 2010 to help ensure that students have access to federal student loans for the 2009–10 academic year. The bill was set to expire July 1, 2009.

The act gives the Department of Education the authority to buy student loans from third-party private lenders in the Federal Family Education Loan Program who have been unable to sell their loans to investors following fallout from the subprime mortgage crisis.

“Our rough economy is already dealing a huge blow to American families and we can’t allow trouble in the credit markets to further price students out of a college degree,” said Rep. George Miller, D-Calif., chairman of the Committee on Education and Labor (“House Moves to Protect Student Loans,” Associated Press, Sept. 15, 2008).

“With market conditions showing no signs of letting up,” Miller added, “it’s only prudent to make sure that students have every assurance that the federal student loans they need will be there next year.”

The measure would also extend the secretary’s authority to advance federal funds to guarantee agencies so those agencies can make loans, if necessary, as a “lender of last resort” for the nation’s colleges and universities.

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Kentucky Set to Buy $50 Million Bond So Students Can Get College Loans

Student Loan Girl — Mon, 18 Aug 2008 22:57:00 GMT

To ensure that Kentucky students get the money they need to pay for school, Kentucky Gov. Steve Beshear has authorized the state to buy a $50 million bond from the state’s student loan agency just before fall classes get underway, reports the Lexington Herald-Leader (“State Using $50 Million Bond to Solve Student Loan Crisis,” Aug. 16, 2008).

Affected by the ongoing credit crunch, the Kentucky Higher Education Student Loan Corp., also known as the Student Loan People, ran out of money last week, but with the “bridge loan,” will be able to begin issuing $35 million in loans to about 16,000 students by Thursday.

Although the recently passed Ensuring Continued Access to Student Loans Act (H.R. 5715) was designed to give the U.S. Department of Education the authority to buy student loans from cash-strapped lenders, the Education Department requires that lenders first obtain short-term “bridge” financing to initially fund new loans. After lenders secure the preliminary financing, the Education Department will buy these college loans, giving lenders the liquidity they need to continue making new loans.

Kentucky is thought to be the first state in the nation to purchase a private placement bond to meet the state’s student-loan needs. Massachusetts has unsuccessfully looked to its public pension funds for relief, while other states have simply shut down their student loan operations, according to an article in the Kentucky Post (“Gov. Orders State Purchase $50M Bond to Ensure Student Loans,” Aug. 15, 2008).

The Student Loan People’s bond sale must be approved by the State Property and Building Commission, an executive branch panel that meets today, and the General Assembly’s Capital Projects and Bond Committee, which will meet Tuesday.

If the bond sale is authorized, the nonprofit state loan agency will have a loan term of 445 days that would be payable on Nov. 15, 2009. The agency will be charged a variable interest rate, currently set at 3.32 percent, which means the agency would pay $1.9 million in interest to the state, on top of the $50 million principal.

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Nonprofit Lenders Hurt by Legislation Intended to Help Them

Student Loan Girl — Sat, 02 Aug 2008 01:53:00 GMT

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.

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Concerns About Access to Student Loans Persist, Study Finds

Student Loan Girl — Thu, 24 Jul 2008 18:42:00 GMT

Some financial aid administrators have lingering concerns that students may not be able to get the student loans they need to pay for college this year despite recently passed federal legislation designed to improve students’ access to those loans, according to a recent survey.

The survey, released this week by the National Association of Student Financial Aid Administrators, showed that NASFAA members who participated in the survey felt that the Ensuring Continued Access to Student Loans Act, HR 5715, may help to alleviate a student loan shortage in the short-term but that a long-term solution is still needed.

More than half of the financial aid administrators who responded to the survey said they had been dropped by at least one lender in the Federal Family Education Loan Program, even though that same lender is still offering student loans to other institutions. Several lenders in the FFEL program announced last spring that they would stop offering student loans to colleges with high default rates, low loan volumes, or both — a practice that 60 percent of the NASFAA members who responded to the survey say is discriminatory and should be prohibited by Congress.

Survey participants were split over the issue of private student loans, which are not backed by the federal government. About half said they thought students would have a more difficult time obtaining private student loans this year but most agreed that the private student loan market has stabilized.

The survey, however, revealed that only a quarter of financial aid administrators have a backup plan in place to handle any problems should the federal and private student loan markets face further disruptions.

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State-Based Loan Agencies May Not Offer Student Loans, Despite Government Intervention

Student Loan Girl — Fri, 20 Jun 2008 23:18:00 GMT

Just this year, some 112 student loan lenders have cut back or ended their participation in the federal and private student loan markets, including nine state loan agencies, who have each issued slightly different responses to the industry’s changes, according to The Chronicle of Higher Education (“Some State Loan Agencies Say They May Stay on the Sidelines This Year,” June 12, 2008).

After the passage of the Ensuring Continued Access to Student Loans Act, which was intended to aid ailing student lenders, state-based student loan agencies in Kentucky, Missouri, and New Hampshire — often the largest student loan providers in their states — have said they will resume lending again sometime this year.

However, the Missouri Education Loan Authority says it will no longer be able to offer borrower benefits like the .25-percent interest rate reductions for those who make automatic monthly payments, or interest rates as low as .25 percent for graduates who gain employment in the state after school.

With over $12 billion in federal student loans, the Pennsylvania Higher Education Assistance Agency, the largest state lending entity in the country, will reduce grant awards to 160,000 low-income students by approximately $500 each, but is still unsure whether it will re-enter the student loan market in 2008.

The other five state-loan organizations in Indiana, Iowa, Massachusetts, Michigan, and Montana that have exited the federal program, say they’re also uncertain if they will start re-issuing loans this year, as they are awaiting clarification on loan servicing regulations under the new law. Many of these state-based lenders question whether they can continue afford to lend through the federal student loan program in light of the recent credit crunch and the elimination of federal subsidies to lenders last fall.

While industry insiders say that the new law is “a good first step,” Will Shaffner, director of business development at the Missouri Higher Education Loan Authority, believes that the federal rescue plan doesn’t go far enough. He said it doesn’t ease the longer-term problems both public and private lenders see with the federal program.

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With Government’s Help, Lenders Returning to Federal Student Loan Market

Student Loan Girl — Thu, 05 Jun 2008 21:08:00 GMT

A number of lenders who abandoned the federal student loan market in recent months may be returning, in light of a new law designed to keep struggling lenders afloat, according to a Dow Jones Newswires article.

Many of the 102 companies that scaled back or withdrew from the Federal Family Education Loan Program, in which federal student loans are funded by private lenders, are expected to at least consider returning to the program for the 2008–09 academic year, writes Dow Jones reporter Melissa Korn (“Student Lenders Tiptoe Back to Market With Government Bailout,” June 4, 2008).

Brett Lief, president of the National Council of Higher Education Loan Programs, said every one of the lenders in his organization "changed their policies" during the credit crunch earlier this year — reducing or suspending their participation in the FFEL program. The 60 FFELP lenders that are members of the NCHELP reported that the changes were necessary because federal student loans were no longer profitable.

But after Congress passed the Ensuring Continued Access to Student Loans Act (HR 5715), which gives the U.S. Department of Education the authority to buy student loans from lenders who have been unable to sell them, those lenders are “all reviewing their policies again,” Lief said.

Before the passage of the act, Sallie Mae, one of the nation’s largest originators of federal student loans, was considering whether to remain in the FFEL program, and Nelnet, NorthStar Education Finance, Inc., and the Kentucky Higher Education Assistance Authority had left the FFEL program.

Under the new legislation, all four of these lenders have reaffirmed they will continue to issue new federal student loans. However, some lenders still question whether the government changes will ultimately be profitable despite the Education Department’s infusion of liquidity, while other lending banks, like Citibank, JPMorgan Chase, PNC, and SunTrust, remain unmoved.

These banks no longer offer student loans to certain colleges — schools that they have determined tend toward higher default rates, fewer borrowers, and smaller loan amounts that make business less profitable.

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Education Department to Pay Lenders Full Value for Student Loans

Student Loan Girl — Wed, 21 May 2008 22:56:00 GMT

The U.S. Department of Education has released details of how much it will pay private lenders in the Federal Family Education Loan Program who sell their loans to the government instead of to capital-market investors, according to an article in The Wall Street Journal ("Bush Will Use Treasury Funds to Bolster Student Loan Market," May 20, 2008).

Under the new authority granted to the Education Department by the Ensuring Continued Access to Student Loans Act" (H.R. 5715), the government can buy loans from private FFELP lenders until Sept. 30, 2009.

In return, these lenders will receive the full principal value of the loan along with accrued interest, a rebate of any loan origination fees paid to the government, and a $75 payment, WSJ writer Robert Tomsho reports.

In an effort to reassure lenders who typically have relied more heavily on the securities markets for their lending capital, the government also plans to invest in newly created trusts that hold federal student loans made by private lenders.

"In effect, the government will reimburse such lenders for the full cost of such loans in return for payments from the trust equal to commercial paper interest rates, currently about 2.6 percent, plus an additional 50 basis points," Tomsho writes.

However, financial details of the plan could change if the federal Office of Management and Budget determines the loan-purchasing plan does not meet the act’s requirement that such measures be cost-neutral.

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