The Federal Reserve’s Open Market Committee cut the federal funds rate - the overnight loan rate between banks - to 3.5 percent from 4.25 percent yesterday. This is the biggest interest rate cut in more than 20 years according to analysts. The interest rate cut is good news for many private student loan borrowers who have variable interest rates. Several loan providers are lowering prime interest rates - the rate that serves as the benchmark for many private student loans - in lock-step with the Fed’s announcement. Most banks typically raise or lower their prime rate by an amount equal to the Fed's rate action.

But several news sources - including The Chicago Tribune, Inside Higher Ed, and The Chronicle of Higher Education - are reporting that the recent economic downturn and belt tightening in the credit markets will negatively affect many student loan borrowers. Sallie Mae, the nation's largest lender to college students, will no longer make private education loans to students who are high credit risks. Corinthian Colleges, Career Education Corp., and ITT Educational Services all received news that Sallie Mae will no longer make private loans to their students, reports Inside Higher Ed.

For its part, Congress will also be spending much of its time devoted to forging an economic stimulus plan to jumpstart what many see as an economy on the brink of recession through February. Congressional Quarterly reports that Senate Majority Leader Harry Reid (D-NV) said Congress needs to pass a stimulus package by the President’s Day recess, which begins Feb. 16. "It’s not easy, but we're going to have to get it done as quickly as possible."

Last week President Bush called for individual income tax rebates and investment incentives for business equal to about 1 percent of the $14-trillion-plus gross domestic product. But the Bush Administration has already signaled that it might be open to an even larger stimulus package.

While the White House said specifics of the stimulus are still being ironed out, Senate Banking Committee Chairman Christopher Dodd (D-CT) said the package "needs to include a component that will address the problems in the housing and credit markets," The Wall Street Journal reports.

With Congress focused on spurring the economy, other legislation - including HEA reauthorization - may take temporary backseat. The Senate passed HEA reauthorization legislation last July. The House Education Committee has also passed reauthorization legislation, but it has yet to reach the House floor. The two bills contain differences that would need to be resolved in conference committee.

By Justin Draeger
NASFAA Assistant Director for Communications

Posted 01/23/08 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.