In a letter to Sen. Christopher Dodd (D-CT) earlier this week, Federal Reserve Chairman Ben Bernanke said that the turbulence in the federal student loan market can only partially be blamed on the lack of liquidity. Subsidy cuts imposed on lenders through the CCRAA passed last year are also to blame, according to Bernanke who said Congress should revisit how it sets lender subsidy rates.
The letter from Bernanke was written in response to a request from Dodd earlier this month where Dodd asked the Federal Reserve to use its authority to intervene on behalf of student loan providers. Bernanke said that the Federal Reserve is trying to restore normalcy in all markets - including the student loan market. Those words were punctuated this week by another quarter point reduction in the Federal Funds rate, the overnight rate at which banks lend money to other banks through the Federal Reserve district banks.
But Bernanke went a step further and placed responsibility back on Congress, saying that the subsidy cuts imposed on lenders last year, along with increased costs associated with raising capital, has made student lending "prohibitive" for loan providers.
"You may decide that a more market-sensitive approach - flexible enough to provide a wider spread during times of market stress and a narrower one during normal times - could provide a more robust structure," Bernanke wrote.
Bernanke’s suggestion echoes a recommendation made by NASFAA in a discussion paper released last October: "Evaluating Student Loan Auctions." NASFAA’s discussion paper states:
"The [appropriate] subsidy rate may just need more frequent adjustments based on empirical evidence, similar to way the Federal Reserve, which monitors inflation, deflation, and economic growth, adjusts the amount of money in the market.
"While student loan providers have been recording record profits in recent years, no action had been taken to adjust subsidization amounts to an acceptable level that would balance taxpayer savings with borrower benefits. A system could be implemented with federal student loans so adjustments are made to subsidization levels based on taxpayer expenditures, a close examination of lender revenues, and market stability.... finding the correct subsidy rate for student loan providers could be more successfully implemented by an apolitical body that has access to loan provider financial statements, SEC filings, and other market indicators to more accurately and regularly adjust subsidy rates.
"If subsidy rates are decreased too much, demonstrated by market volatility, a correction could be made. If the market is stable, and loan providers record excessive profits, another correction could be made.
"In the past ten years Congress evaluated the appropriate subsidization levels four times: in 1997, 2001, 2003, and 2007. In each instance adjustments were made to fund other programs, tax credits, tax break; to pay down the deficit; or to retaliate against excessive lender revenues. Evaluating and adjusting subsidization levels more often with different criteria might do more to balance taxpayer savings without sacrificing borrower benefits or a healthy market."
Additional Media Coverage
By Justin Draeger
NASFAA Assistant Director for Communications
Posted 05/02/08 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.
