Student Loan Blog : Secretary of Education

Student Loan Lending Still Going Strong

Student Loan Girl — Mon, 12 Jan 2009 23:34:00 GMT

Despite being hampered last year by a lack of investors and a lack of access to credit, federal student loan lenders are surviving the economic crisis — making the student loan market one of the few lending industries still able to thrive this year, The Wall Street Journal reports (“Tuition Ammunition: a Happy Lesson on Lending,” Jan. 6, 2008).

Proactive and swift action by the federal government, which guaranteed 18.6 percent more student loans for the 2008-09 academic year than the previous year, has helped the student loan industry avoid the decreases in volume seen by the mortgage and banking industries.

In addition to a move by the Treasury Department to infuse tens of billions of dollars into U.S. banks so lenders could issue new student loans, Congress passed legislation that allowed the federal government to buy up student loan securities from cash-strapped lenders.

The Ensuring Continued Access to Student Loans Act (HR 5715) was intended to help student loan lenders, allowing the government to buy loans directly from these lenders, and may have contributed to a 9.4-percent climb in loan originations for the 2008–09 academic year by lenders in the Federal Family Education Loan Program (FFELP). While the legislation has been in place, the government has purchased about $97 million in student loans and invested nearly $10 billion in student loan trusts, figures that are expected to grow before the end of this school year.

“What we’ve seen so far is that programs we have put in place are having the desired effect,” said Education Secretary Margaret Spellings. Although she’s optimistic that the government’s efforts to boost student lending are working, she said she’s not ready to “declare any victories.”

Credit Markets Hinder Private Student Loan Lenders

While federal student loan lenders seem to be riding out the economic storm, observers say it’s unclear whether the private student loan market, which is suffering greatly from the credit crunch, will experience the same success.

After the market for selling bundled student loan securities dried up, the Federal Reserve initiated a $200 billion program in the hopes of encouraging investors to continue buying these securities. Analysts say, however, that these efforts may not be enough for the private student loan industry to compete with the demand for and the availability of low-cost federal student loans.

Last school year, private student loans accounted for about $17.6 billion, just one-fifth of the $85.9 billion in total student loan lending, according to the College Board. This year, lenders and analysts estimate that private student loan lenders have done 25 percent less business.

Already 39 lenders have stopped making private student loans, and others have tightened their lending criteria, both of which may force financially struggling families to pursue more affordable higher education options, said Tim Ranzetta, president of Student Lending Analytics, an independent research and advisory firm. “The cloud of this financing issue,” Ranzetta said, “will push more [students] to state public universities and community colleges.”

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Justice Department Should Weigh In On Student-Loan Loophole Scandal, Senator Says

Student Loan Girl — Wed, 08 Oct 2008 23:57:00 GMT

Rep. Thomas Petri, R-Wis., wrote to Secretary of Education Margaret Spellings this week asking whether she plans to involve the Justice Department in the investigation of a federal subsidy loophole that benefited nonprofit student loan providers and may have cost the federal government nearly $1.2 billion (“Republican Lawmaker Presses Spellings on Loan-Loophole Losses,” The Chronicle of Higher Education, Oct. 3, 2008).

“In order to restore integrity to the guaranteed-loan program,” Petri wrote, “it is vital that we understand where abuse has occurred.”

The audit of 14 student loan companies, published last month, found that a loophole in a government subsidy program, which guaranteed a 9.5-percent return on nonprofit lenders’ student loans, may have inadvertently allowed lenders to collect nearly three times the amount of subsidies they would have otherwise been entitled to.

If the actions of these lenders are representative of all student loan companies that participated in the subsidy program, writes Paul Basken of The Chronicle, “it would mean the government lost nearly $1.2 billion in improper payments over a six-year period, or about twice the previous estimates.”

Lenders Allowed to Keep Subsidies, Continue Using Program

The government subsidy program — initiated almost 30 years ago to encourage lenders to offer affordable student loans at a time when interest rates were high — gave nonprofit student loan lenders a guaranteed 9.5 percent rate-of-return on student loans they issued.

In 1993, after interest rates had dropped, Congress eliminated the 9.5-percent interest rate guarantee but grandfathered in all loans that lenders issued at the 9.5 interest rate before the cutoff date. To get around the cutoff, some lenders began “recycling” new loan money through old accounts to make them eligible again for the expired 9.5-percent subsidy rate (“Government Losses on 9.5 Percent Loan Loophole May Exceed $1 Billion,” The Chronicle of Higher Education, Sept. 18, 2008).

The audit’s findings come after Spellings, in January 2007, allowed lenders who had taken advantage of the loophole to keep the disputed subsidy payments they had already received. As part of her settlement offer, she also said that student loan providers who wanted to continue billing the government under the 9.5-percent rate program would have to provide independent audits proving their calculations were not based on the loophole.

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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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Proposed Bill Combines House, Senate Versions of the Higher Education Act

Student Loan Girl — Wed, 14 May 2008 23:51:00 GMT

Congressional aides hope to finalize a renewal of the Higher Education Act by Memorial Day that merges different versions of the proposed bill passed separately by the House of Representatives and the Senate last year, according to an article in The Chronicle of Higher Education (“Compromise Higher-Education Bill Takes Shape in Congress,” May 14, 2008).

Although the draft of the measure that is circulating Washington does not include provisions on graduate education, new programs, or private student loans — three of the bill’s 11 sections — the measure is already nearly 700 pages.

The issues that the two houses appear to have reached a compromise on include college cost watch lists, accreditation, and campus piracy:

Negotiators hope to give consumers more accurate and useful information about higher education costs by bolstering current watch lists. These lists, established by the House bill, already identify the most and least expensive colleges and those with the highest percentage of tuition increases. But under the compromise bill, institutions with the highest and lowest “net price” would also be listed.

The current 15 members of the National Advisory Committee on Institutional Quality and Integrity, which advises the Department of Education on accreditation, would be replaced with 18 new members, six each appointed by the secretary of education, the Senate, and the House.

Colleges would be required to develop plans to detect and prevent illegal downloading of music and videos on college campuses and to offer alternatives to such illegal downloading.

Issues that are still being negotiated include whether states should be punished for cutting their higher education budgets, whether textbook publishers and colleges should be required to disclose more information about the costs of the books, and whether colleges should be required to notify students and employees within 30 minutes of a campus emergency.

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President Bush Signs Legislation That Boosts Availability of Student Loans

Student Loan Girl — Thu, 08 May 2008 16:15:00 GMT

On May 7, President George Bush signed into law legislation intended to help stabilize the $85-billion student loan industry and to avert a predicted shortage in student loans.

The law will allow the U.S. Department of Education to buy bundled student loans that lenders have been unable to sell to investors. Sales of these loans will create capital to help lenders make new loans.

In addition, the measure will allow the Education Department to loan federal money to guarantee agencies, so those agencies can issue student loans, if necessary, under the “lender of last resort” system,” according to an article in The Chronicle of Higher Education (“Bush Signs Student-Loan Bailout Bill Into Law,” May 7, 2008).

The new law is expected to simplify that system, under which students who have been denied student loans can petition the government as a last resort, by allowing the Secretary of Education to designate an emergency lender for an entire school instead of on a student-by-student basis.

Rep. George Miller, D-Calif., chairman of the House education committee and a chief backer of the legislation, said the passage of the bill should send a strong message to the public (“Bush Signs Student Loan Market Stabilization Plan,” Reuters, May 7, 2008).

“With this bill signed into law,” Miller said, “students and families now have every assurance that they will continue to have access to all the federal student loans they are eligible for, no matter what happens in the nation’s financial markets.”

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