The Honorable Margaret Spellings
Secretary
U.S. Department of Education
400 Maryland Avenue, SW
Washington, DC 20202

Dear Secretary Spellings:

Students and parents face many obstacles when pursuing their higher education goals. This is especially true for students from low-income families who rely on federal financial aid, including loans, to overcome financial barriers. Unfortunately, troubles in the capital market have raised the possibility that students' access to federal loans may be disrupted.

Any disruption of the federal student loan program will have the greatest negative impact on the nation's most vulnerable students - the very students the financial aid programs are designed to help. The National Association of Student Financial Aid Administrators (NASFAA) is pleased that you are reviewing potential responses to a worst-case scenario with the Secretary of the Treasury Department Henry M. Paulson. We would like to emphasize that any solutions must be seamless to students and not create additional barriers to accessing student assistance. We hope you will consider the following insights, concerns, and recommendations in your discussions.

From our perspective, three safety nets should be put in place to ensure all federal loans remain accessible to all eligible students: Lender of Last Resort (LLR), modified to reduce barriers to students; ability to transition to Direct Loans with as little administrative and financial burden as possible; and an increased infusion of liquidity to the student loan market.

Preparing LLR as a backstop for students who are unable to borrow is a critical step to ensuring access to loans. However, we are concerned that LLR is relatively untested, and its requirement that students may need to prove they were turned down by up to two lenders would be an additional barrier for students trying to pay for college. NASFAA urges you to consider allowing institutions to certify that there is a loan access problem at the institution, so borrowers won't bear this additional burden.

The Department of Education has also assured our members that the Direct Loan program will be prepared to act as a lender for any institution that is not able to get FFELP loans. We applaud the Department for taking steps to ensure that the Direct Loan program is a viable back-up, but we also have concerns about the logistics of institutions moving quickly to the Direct Loan program while providing loans seamlessly to students.

Transition to the Direct Loan program and LLR are important options that should be fully developed. However, we believe these options are largely untested and it is uncertain how a large-scale exodus of FFELP lenders would be replaced by LLR and Direct Loans before the start of the fall semester. Any disruption caused by operational complications would have the greatest negative impact on the most vulnerable students, who may be discouraged from attending if the aid process becomes any more complex or cumbersome.

NASFAA also supports an injection of liquidity into the student loan market so non-bank lenders will be able to provide student loans and other benefits to students this fall.

As you noted in your March 14 testimony before the House Education and Labor Committee, this is a fluid situation that seems to change daily. NASFAA has been closely monitoring the situation and we are very concerned about recent developments. We are aware of student loan providers dropping from the FFELP participation almost daily. Most recently HSBC and M&T Bank announced suspension of their FFEL programs.

In addition, we are hearing from more state lending agencies and nonprofit lenders that they will soon be unable to make loans because they cannot raise capital. When these lenders leave the FFELP, students not only lose access to low-cost loans, they also lose benefits like financial literacy programs, college planning, career planning, outreach, debt management programs, and teacher and military loan forgiveness programs.

All this suggests that the situation seems to be deteriorating further.

As you are aware, April 1 represents the beginning of the greatest demand for student loan borrowing. NASFAA is concerned that if too many loan providers are forced out of the FFELP, other banks will not have the capacity or infrastructure to fill the credit needs for all students, and low-income students will be the first to get left out in the cold.

We urge you to consider restoring confidence in this precarious market by allowing non-bank student loan providers to use the loans that they have been unable to sell as collateral to borrow funds from the federal government so they can make loans this fall and to pursue other financial strategies in order to provide a backstop for this element of the marketplace. These actions would be the easiest and surest way to ensure students continue to have seamless access to federal loans. And, it would reestablish a sense of confidence in the marketplace at a time when it is most needed. It would also likely prevent any further decrease in the pool of available lenders.

We urge you to act immediately. There is too much at risk to wait. The nation's students and families are depending on you.

Thank you for considering my concerns and I urge you to contact me with any questions, concerns or requests.

Sincerely,

Dr. Philip R. Day, Jr.
President and CEO
the National Association of Student Financial Aid Administrators