The Ensuring Continued Access to Student Loans Act (ECASLA) has done a good job of making sure students have access to federal student loans this year. But even as the law is shoring up the loan market for some students, it may have left others behind. H.R. 7072, introduced by Howard "Buck" McKeon, ranking member of the House education committee, would allow the Department of Education to open its liquidity plan to include rehabilitated loans (Sec. 428F).
NASFAA supports H.R. 7072 as an important measure to ensure that all eligible students have access to federal student loans, including borrowers who have satisfied rehabilitation requirements. NASFAA supports two other measures in the bill as well. One provision would reduce borrower confusion by mandating that loans retain their original servicers even after they've been purchased by the Department. Another provision could bring more lenders back into the student loan program by allowing the Department to forward fund purchase agreements.
Loan Rehabilitations
ECASLA only authorizes the Department to purchase, or enter into forward purchasing agreements, on FFELP Stafford and PLUS loans originated on or after October 1, 2003. The law does not allow the Department to purchase rehabilitated defaulted loans, and that means thousands of students who have successfully completed the requirements to rehabilitate their loans could be sitting in limbo unless Congress takes action.
Students with defaulted loans are ineligible for federal student aid. Under the HEA's "Default Reduction Program," borrowers may have their defaulted Stafford loans moved back into good standing with normal loan benefits and deferments after making nine voluntary on-time payments within 10 consecutive months. After a borrower meets the rehabilitation requirements, guaranty agencies sell those defaulted loans back to an eligible lender. Once sold, the loans move back into good standing and borrowers become eligible for additional Title IV aid.
But given lenders' inability to raise capital, they are unable to come up with the billions of dollars needed to repurchase the defaulted loans.
"The freezing of the capital markets has not only impacted a lender's ability to make new loans but also to purchase rehabilitated loans," said Brett Lief, president of the National Council of Higher Education Loan Programs (NCHELP). "A loan is not considered to be rehabilitated until it is purchased by a lender. It is only after a loan is purchased that the borrower regains eligibility for Title IV eligibility."
Lief estimates that lenders would need about $4 billion in capital to purchase all of the loans that could be rehabilitated this year. Without those funds, it's possible that hundreds of thousands of eligible borrowers could be denied federal student aid because the loans will still be marked in a default status.
So far the problem is affecting a handful of guarantors, but that number is expected to grow unless market conditions or lenders' access to capital increases.
Other Technical Changes
H.R. 7072 would also make other changes to the Department's liquidity plan. It would mandate that the Department retain the original servicer on loans it purchases from lenders. This would make it easier for borrowers during repayment since it would ensure they continue to have one servicer and one repayment amount. Currently the Department is planning to use a government contracted servicer for all purchased loans, which would result in multiple servicers and possibly repayments for borrowers.
The bill would also allow the Department to provide forward funding to lenders, as opposed to necessitating bridge financing. Many nonprofit and state agencies have been unable to participate in the Department's liquidity plan because they lack the funding needed to originate new loans to be used as collateral. Some state agencies have been successful in securing bridge loans by using state bonds, but many others have not been able to raise the upfront money needed to utilize ESCALA. The Department is only purchasing originated loans first disbursed on or after May 1, 2008.
Finally, the bill would clarify that lenders may only use funds received through the Department's liquidity plan to originate or purchase new federal loans.
The bill has been referred to the House Committee on Education and Labor. NASFAA will continue to monitor its progress.
By Justin Draeger
NASFAA Associate Director for Communications
Posted 10/03/08 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.
