The House Education and Labor Committee pressured U.S. Department of Education Secretary Margaret Spellings at a hearing on March 14 to prepare lender of last resort (LLR) and the Direct Loan program to provide federal loans to students if the FFEL program is unable to provide enough loans to meet students' needs in the fall.
Lawmakers and Spellings agreed that it was unlikely that there would be a serious federal loan access problem, but recognized the importance of being prepared for the worst case scenario to ensure that students are not denied federal loans.
In testimony submitted the committee, NASFAA urged lawmakers to prepare for the worst case scenario today.
"Waiting until the height of the lending season in July through September is not an option," NASFAA President and CEO Dr. Philip Day writes.
Committee chairman George Miller (D-CA) said he remained confident that the recent capital market troubles would not affect the majority of students and institutions, but expressed some concern that there might be gap in access to loans.
"There may be a gap, not a terribly large gap, but a possible gap that may need to be filled in a seamless fashion," Miller said in his opening statement.
Spellings assured committee members that the Department was closely monitoring the situation and would be prepared to act if access to FFELP loans was restricted due deteriorating market conditions. Lawrence Warder, the Department's chief financial officer, told lawmakers that every time a lender suspended FFELP loans, the Department contacted every institution that had 50 percent or more of its loans originated by that lender to assess the situation.
"They've all said they have been able to replace the lender with another lender," Warder assured lawmakers.
The majority of the hearing focused on the lender of last resort and the Direct Loan program as the solutions to any gap created by lack of participation in the FFELP. When asked by lawmakers if these to solutions would be enough to ensure access to loans should market conditions worsen, Spellings said the Department believed this would be adequate.
Lender of Last Resort
Spellings told lawmakers that the Department was reviewing the options and tools available should the situation warrant their use. Despite assurances by Spellings that the Department and Guaranty Agencies would be ready to provide a lender of last resort for students, Miller expressed concern that the Department has not done enough. Throughout the hearing it became clear that there was much work to prepare LLR for full implementation
When Miller asked if the Department had plans and procedures in place for the federal government to provide capital to guaranty agencies to make LLR loans, Spellings said she had not discussed this with Treasury Department Secretary Henry Paulson, but would ask him about it in future meetings. In addition, Terry Muilenburg, senior vice president of the guaranty agency USA Funds, testified that guaranty agencies and their association, the National Council of Higher Education Loan Programs (NCHELP) had not been in contact with the Department about LLR despite their efforts to contact Department officials.
Spellings said the Departments plans to send guaranty agencies letters this week and to work with them to ensure LLR is ready to implement.
The Higher Education Act requires guaranty agencies to serve as, or arrange for, a backstop and must have procedures in place to address LLR situations. Muilenburg said that to her knowledge all guaranty agencies have these procedures, but LLR loans have only been made in limited situations, using nonfederal money.
"These narrowly-focused programs were not intended to address broad scale disruption in the lending market," she said. "Given the current situation with the credit markets, it is essential that all parties be prepared to step in to address a situation where students are unable to obtain federal student loans. It is critical that all stakeholders are prepared to act quickly and effectively, so that every student at every Title IV eligible institution has access to Federal student loan funds. For this reason, USA Funds strongly encourages the Department to promptly work with guarantors to develop specific plans that could be quickly implemented should it become necessary to activate an LLR program."
Rep. Rob Andrews (D-NJ) suggested that the Department allow school-based qualification for LLR rather than student-based qualification. He expressed concern that some students who had their loan applications rejected would be discouraged and would give up. Allowing whole institutions to be eligible for LLR would avoid this and make the LLR process easier for students.
This idea seemed popular among other lawmakers and Department officials said it was something they would consider. However, Spellings noted it could be complicated because of the student loan diversity within institutions.
Direct Lending
Spellings said the Department will be ready for "any significant shift in loan volume" from the FFELP to the Direct Loan program.
"Currently, 850 schools already authorized to make Direct Loans have chosen to remain with FFEL as their primary program. We stand ready to support them in whatever choices they make, now and in the future," Spellings said.
However, there was some debate about how easily and quickly an institutions could switch from the FFELP to the Direct Loan program, should the need arise.
Warder said the Department is working to make the Direct Loan program appear like any FFELP loan provider to make it easier for institutions to switch and currently it would take a school one to two weeks to get authorization to participate in the DL. However, Spellings and Warder noted that it would likely take an institution more time to implement the new loan program and would be an additional administrative burden on the institution.
Miller, a Direct Loan program proponent, suggested that institutions might want to apply to participate in the Direct Loan program now, so they would be ready if they could no longer get FFELP loans.
This type of suggestion drew criticism from the committees ranking Republican Howard "Buck" McKeon (R-CA), who suggested that Direct Loan supporters in Congress wanted to force schools into the Direct Loan program even though it might not be in the best interest of the school or its students.
Sarah Bauder, director of student financial aid at the University of Maryland (a FFELP school), said that switching to Direct Loans would not be a big switch for the school, but it would be cumbersome to make the switch seamless for students.
"Switching to DL is not easy," she said. "It is a change in culture, systems, software, and communications. If we didn't do it correctly it would cause big problems down the road."
She suggested it would take a full year to properly make the switch.
Non-Profit Lenders
While there was general optimism about the ability of the FFELP to rebound from the current turmoil, the picture was not so optimistic for some non-profit FFELP loan providers.
Charlie Sanders, president and CEO of South Carolina Student Loan Corporation, said that while disruption may not be widespread initially, the potential is there for many more students to soon be without their provider of choice. He noted that investors for student loan bonds have disappeared making it impossible for these lenders to raise capital for new loans.
"Some of my colleagues in this market are paying rates as high as 18 percent, at a time when the statutory yields we earn on FFEL program loans are roughly 4.5 to 5 percent," he said. "Several news reports have described how individual nonprofit lenders are losing millions of dollars on their loan portfolios each month. The point here is that many lenders are seeing a negative return on funds and they do not have other sources of capital to draw upon."
Sanders warned that this threatened many services provided by these lenders, including financial literacy programs, college planning, career planning, outreach, debt management programs, teacher and military loan forgiveness programs, and training opportunities for higher education professionals.
"Our absence would likely produce a disparate impact on different institutions within the state, with students at some schools facing a greater restriction of choice than their peers at other schools," he said.
This is a capital markets problem and the Lender of Last Resort does not solve the market problem, he argued.
Sanders said that the best way to solve the problem seamlessly was to provide timely and limited federal financing to inject liquidity into the market and have the Treasury serve as a backstop for auction-rate bonds.
A Fluid Situation
Spellings noted that the situation was fluid and at this point the Department was still gathering and assessing facts to determine the proper course of action. She assured lawmakers that the Department would be ready to fill any gap in students' access to FFELP loans. However, some lawmakers expressed concern that the Department was not acting fast enough and needed to act now to ensure that loans would be available in the fall.
Media Coverage
By Haley Chitty
NASFAA Assistant Director of Communications
Posted 03/17/08 to www.NASFAA.org. Please submit Web Site questions or comments to Web@NASFAA.org
