Alarming reports in the media about disruptions in the credit markets affecting student loans and announcements from student loan providers have many questioning whether loans will continue to be available to students in the near future. NASFAA has been monitoring these student loan developments and been in contact with the student loan community to assess the situation.

While nothing is certain, NASFAA expects students' access to private education loans to be restricted at some schools (at least in the near future) due to tightening in the credit markets. However, NASFAA expects students' access to FFELP loans to be secure in the near future.

"NASFAA is concerned about how students' access to loans will be affected by credit market disruptions and we're watching these developments very carefully," said NASFAA Interim President Joan Crissman. "We are actively working with concerned parties to keep close tabs on how students are being affected and to ensure students will continue to have access to access to low-cost, affordable student loans."

NASFAA and other loan experts remain confident that students will continue to enjoy access to FFELP loans because of the number and variety of student loan providers. The tightening credit market has limited the liquid assets of student loan providers that are not banks (Sallie Mae, Nelnet, College Loan Corp., nonprofit state agencies and others). These non-bank loan providers are having a difficult time raising enough cash through asset-backed securitization (ABS) and bond deals to continue making loans

Recently Sallie Mae, EdSouth, Brazos Higher Education Service, and College Loan Corporation have all had securitization auctions go to market and subsequently fail. "Wall Street firms hold auctions of these securities regularly, allowing investors to roll them over with new interest rates or to sell them. When auctions fail, which is unusual, investors like funds and corporate treasuries can find themselves suddenly saddled with long-term securities," The Wall Street Journal reports.

However, student loan providers that are banks (Citi Bank, Bank of America, JP Morgan Case and others) do not face the same shortage of liquid assets because of their relationship with the Federal Reserve and because they have other divisions from which to obtain capital. These banks are expected to continue making FFELP loans and there are some indications that some are using recent developments to increase their market share as non-bank lenders are scaling back. JP Morgan Chase & Company announced it was lowering fees and rates on loans, presumably in an effort to increase its market share.

There is some question about the profitability of student loans following the subsidy cuts enacted by Congress in 2007 and in the previous Congress. It is possible that in the future bank lenders will divert their cash on hand elsewhere if federal student loans are determined to be less profitable than other investments. But the fact that some of these bankers are using the turmoil to make inroads into new FFELP markets to increase their market share also suggests that FFELP student loans remain in good shape in the near future.

If the credit crunch is prolonged, lasting into the summer and fall, there could be disruptions in FFELP. But given that ABS made up of FFELP loans are such a secure investment, it is believed that investors will once again begin bidding on them in the near future, allowing non-bank student loan providers to raise capital. Additionally, Federal Reserve Chairman Ben Bernanke said that the underlying quality of student-loan debt securities is strong when he testified before the Senate Banking Committee. If Bernanke is correct, then it is unlikely that lenders will continue to have trouble selling loans to raise capital to make more federal loans in the long term.

NASFAA has been in contact with the Department of Education about the shared concern of continued access to student loans. Larry Warder, acting chief operating officer of the Office of Federal Student Aid indicated that the Department, in conjunction with other federal agencies, is closely monitoring the situation in the credit markets and its effect on the federal student loan programs. Department officials have also met with representatives of the lending community to discuss market conditions and their potential impact on students and families.

He assured that, so far, access to federal student loans has not been affected by the recent credit market turmoil.

"In the few instances where a lender has decided to reconsider its participation in the FFEL program or with a school, even if only temporarily, we are in the process of contacting those schools to ensure their students have other lending options," Warder said. "Thus far, we have not encountered any situation in which an eligible school did not have access to federal student loans. Students and families should be assured that federal student loans are available."

NASFAA has also been in contact with Federal officials and the student loan community seeking solutions to help stave off any disruptions in the FFEL market.

The effect of the credit markets on student loan availability has attracted the attention of lawmakers in Congress who sent a letter to Education Secretary Margaret Spellings and Treasury Secretary Henry Paulson urging the Bush administration to address the recent credit market troubles to ensure access to student loans.

"We urge you to engage with each other and with federal financial institutions such as the Federal Financing Bank, the Federal Home Loan Bank System, the Federal Reserve System and other appropriate entities to encourage them to use their existing authorities, including lender of last resort, in a timely manner to assist in ensuring liquidity and the availability of various financing mechanisms for the purpose of bringing stability to the student loan financing market," the letter states.

It seems unlikely that FFELP critics Sen. Edward Kennedy (D-MA) and Rep. George Miller (D-CA), the chairmen of the Senate and House education committees, will undo last year's cuts to student loan subsidies, but the attention by lawmakers makes it less likely that the problem will be allowed to grow to seriously limit students' access to loans.

Treasury spokeswoman Jennifer Zuccarelli told the Associated Press that the "Treasury continues to monitor all markets closely, including the student loan market."

Students' access to private education loans is less certain. On one hand, investors' reluctance to buy asset-backed securities (wholly or partially) composed of private loans signals that investors are worried about the viability of those loans. The fall-out from the mortgage industry shook investors' confidence in these assets. The result is a reluctance to invest in anything. Some experts predict that this could be a short-term problem that will self-correct in the near future. But that is conjecture because other reports have shown that some lenders (most noticeably Sallie Mae) have extended too many risky loans to students who are more likely to default.

"Sallie Mae has lent too much money to students who have gone to schools without very good graduation records," said Sallie Mae's CEO Al Lord during the company's 2007 fourth quarter earnings call. "Such students at such schools are virtually singly responsible for 60% of the '07 credit losses."

In response to these revelations, Sallie Mae lenders have announced they are tightening their lending standards, leaving higher-risk borrowers out in the cold.

The effect of tightened lending standards remains unknown and is currently being debated. There are two trains of thought on this development. The first, vocalized by the Career College Association and others, argues that limiting access to private loans will prevent many low-income students from achieving their higher education goals. The second, vocalized by student borrower rights groups and others, argues that limiting access will hamper predatory and misleading lending tactics that extend loans (or too much debt burden) to students who are crushed by debt burden when they leave school.

Both groups have a valid argument and NASFAA sympathizes with both sides. NASFAA would like to see private loans made available to students who really need them, but only after they have exhausted their federal loan options and received ample counseling from the financial aid office so they understand all the risks and responsibilities of borrowing. Unfortunately, the boom in direct to consumer marketing cuts many financial aid offices out of the student loan process and these students borrow without the benefit of counseling provided by the financial aid office.

On a larger scale, the restricted access to private loans highlights the need for more need-based financial aid and increases in federal student loan limits. In a perfect world, colleges would be able to provide financial aid packages to needy students that would eliminate the need for private loans. NASFAA continues to advocate for a greater investment in need-based student aid.

A Brief History of Asset Backed Securities

Asset-backed securities (ABS) first came about in the 1980s as a way for finance companies to "liquefy" their balance sheets. It works like this: lenders require capital to continue lending money. Borrowers provide a steady source of income as they repay their loans. But demand for new loans often times outpaces the amount of money coming back from current borrowers. To raise capital, lenders borrow against their own assets (i.e. their loan portfolios) by selling future returns on public markets.

Securitization refers to the process of bundling several types of assets together and selling them on the free market. Mortgage companies were the first to begin using securitization as a way to raise capital in this way in the 1970s, but credit card, auto, home equity, and student loans are all securitized today. Securitization allows lenders to keep less cash on hand and turn their assets into cash that can then be turned into additional loans.

Like mortgage-backed securities that are guaranteed by the U.S. government, federal student loan securities are a safe investment because they're seen as "bankruptcy-proof," which means there's a high probability the loans will be repaid. Federal loans are also backed by the federal government, who reimburses a lender 97 cents on the dollar for each borrow who defaults. Private student loan securities are riskier, and so investors expect a higher rate of return and will be more cautious about investing in those assets.

Other Media Coverage

• Capital sparse in some U.S. student loan markets (Reuters)
• Student Loan Stress Reshapes Industry (Associated Press)