Late yesterday, government officials held a meeting with lenders where they unveiled their proposal to deal with the student loan credit crunch. Today, U.S. Department of Education Secretary Margaret Spellings issued a Dear Colleague Letter to lenders outlining plans to provide liquidity to FFELP loan providers.
Initial reactions from some in the lending industry were optimistic that the Department's proposal would be enough to keep them participating in the program for the 2008-09 academic year. However, it remains uncertain if the plan will be enough to keep all lenders participating in the FFELP program.
The letter from the department outlined four steps the Department is pursuing to ensure continued and timely access to federal student loans for all eligible student and parent borrowers while respecting and supporting the current FFEL Program as a successful public/private partnership and protecting taxpayer interests. These steps are:
- A specific package using authority granted to the Department through the recently enacted "Ensuring Continued Access to Student Loans Act" (P.L. 110-227) to purchase loans from lenders for the 2008-09 academic year and offer lenders access to short-term liquidity
- Work with student lending community to ensure FFELP and other loan programs serve the best interests of students and taxpayers
- Enhanced lender-of-last-resort program to ensure all students continue to have access to FFELP loans
- Capacity to double the Direct Loan Program, should it be needed.
Regarding the first step, the Administration is continuing to refine the pricing and terms of the program to ensure they meet the legal requirement that there is no net cost to the Federal Government. A Federal Register notice will include the final prices, terms, and conditions, as well as the Administration’s methodology for determining cost neutrality. The letter did say that the program would allow lenders to finance and keep loans bought by the Department in the event that the capital markets improve. Under the program, the Department will purchase an eligible FFELP loan at a price equal to the sum of (i) par value, (ii) accrued interest (net of Special Allowance Payments), (iii) the 1% origination fee paid to the Department, and (iv) a fixed amount of $75 per loan (for lenders’ administrative costs).
Regarding the lender-of-last-resort program, the Department said that these plans will be finalized within the next several days and guaranty agencies will be able to apply for federal advances to make LLR loans on June 1, if needed. Although the Secretary indicated that ED's "... goal was to keep the use of the LLR program at an absolute minimum ..."
Regarding the Direct Loan Program, the Department said it has the capacity to double its Direct Loan origination volume from $15 billion to $30 billion, but ED stated that they "are confident that the liquidity and LLR programs will reduce the need for institutions to shift to the Direct Loan program." The Department also said it is "addressing the hardware, software and human resource constraints to further increase ability to originate and service Direct Loans."
NASFAA staff has not had an opportunity to fully evaluate the effectiveness of the proposal, but it seems to be a step in the right direction. As you know, the devil is in the details and some critical details remain unknown.
NASFAA President and CEO Dr. Philip Day assures NASFAA members that the association will keep members apprised of developments in a timely fashion.
Additional Resources
By NASFAA Staff
Posted 05/21/08 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.
