Panelists and Senators painted a bleak picture of future student loan access if current trends continue and the federal government does not intervene at a Senate Banking Committee hearing held Tuesday.
"It is our view that the gap between available loans and the demand for them could manifest itself as early as May," said Jack Remondi, Sallie Mae's vice chairman and chief financial officer. Remondi said that non-bank lenders, which make more than 75 percent of federal student loans, are facing the "difficult decision of exiting the student loan business or continuing to make loans at a significant loss."
Tom Deutsch, deputy executive director of the American Securitization Forum, explained that lenders are operating at a loss because it is costing non-bank lenders dramatically more to borrow money and lenders are not able to recoup these additional costs because the interest rates charged to students on FFELP loans are set by law and can't be increased.
In testimony submitted to the committee, NASFAA expressed concern that if too many FFELP loan providers leave the program, other banks and non-profit loan providers will not have the capital, capacity, or infrastructure to fill the credit needs for all students.
"Low-income students, who are the least able to find alternatives, will be the first to face an inability to secure loans," NASFAA President and CEO Dr. Philip Day noted in his testimony.
In addition to low income students, the impending loan crunch threatens the financial security of countless higher education institutions, according to Sarah Flanagan, vice president for policy development at the National Association of Independent Colleges and Universities
The committee's Chairman Christopher Dodd (D-CT) recognized the seriousness of the situation noting that "this is not a crisis, but we are on the cusp of concern and crisis."
Dodd said he planned to send a letter to Treasury Department Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke urging them to act to provide liquidity in the student loan market so lenders can continue to make loans. In the letter he notes that if the Bush administration fails to act then Congress will enact legislation to ensure access to loans.
"The current situation demonstrates how reliant students have become on loans," Dodd said in his opening statement. "In an ideal world students wouldn't need education loans but as long as [loans are] needed, we should do all we can to ensure they are available."
A Quick Fix
Remondi and Deutsch recommended that the Department of Treasury's Federal Financing Bank (FFB) provide liquidity for federally guaranteed loans. Remondi testified that this would be "least disruptive, most cost-effective, most manageable, and quickest proposal to implement" to avoid the oncoming loan shortage.
The FFB is already authorized by law to purchase federally-guaranteed student loans so additional legislation would not be needed, but the FFB would only be able to buy $15 billion in loans.
"I believe that creating liquidity for federal loans would have spillover benefits to the non-federal market as well," Remondi said, noting that it would free up some capital for Sallie Mae to make additional private education loans.
"We do not have weeks or months to decide the best course of action," Remondi said. "The Administration can move immediately to make available advances from the Federal Financing Bank, and that would have the least disruptive, most immediate and beneficial impact on the situation."
Because of the $15 billion limit on the FFB, Remondi and Deutsch also suggested that student loan asset backed securities (ABS) be allowed to be used as collateral to borrow from the Term Securities Lending Facility (TSLF), which the Federal Reserve Bank recently created to supply additional liquidity to the markets. This solution would also not require legislation.
More Lenders Suspend FFEL Programs
As if to emphasize the potential seriousness of the situation, the Michigan Higher Education Student Loan Authority (MHESLA) and the Massachusetts Educational Financing Authority (MEFA) announced this week that they would suspend their FFEL programs.
In addition, Chase confirmed that it would no longer make federal loans to students who attend certain high-risk institutions.
During the hearing, Patricia McGuire, president of Trinity Washington University warned against lenders using institutional graduation rates to determine whether they should lend to students at any particular school. She argued that the current methods used to determine graduation rates are flawed because it does a poor job of tracking transfer students, among other issues.
"Lenders need to be careful about using flawed methods to determine loan eligibility," McGuire said.
Dodd also expressed concern about lenders deciding not to lend to students at certain institutions and said he was going to do all he could to see that this practice stops.
PLUS Problems
Dodd also expressed concern that current law prohibits individuals who have had their home foreclosed from being eligible for PLUS loans for five years after the foreclosure. He said it was unfair to further punish people who had been caught up in the subprime mortgage troubles by not allowing them to borrow funds to send their children to college.
The House Education and Labor committee has approved legislation that would eliminate this restriction on PLUS loans and Dodd express interest in providing similar relief through Senate legislation.
Media Coverage
By Haley Chitty
NASFAA Assistant Director of Communications
Posted 04/16/08 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.
