Yesterday, the Department of Education announced that it would begin purchasing FFELP loans under its liquidity plan from the 2007-08 academic year. While the Ensuring Continued Access to Student Loans Act (ECASLA) allows the Department to purchase FFELP loans as far back as 2003, the Department has only been purchasing loans disbursed on or after May 1, 2008. This latest announcement means the Department will purchase loans disbursed on or after May 1, 2007.

This decision comes only two weeks after the Department's previous announcement that within the next year it would implement an additional funding plan for all fully-disbursed non-consolidation FFELP loans awarded between October 1, 2003 and July 1, 2009.

The decision to purchase loans from the 2007-08 academic year will be used as a "short-term" solution and "act as a mechanism to minimize disruptions in the interim until the conduit(s) are operational, or until February 28, 2009, whichever occurs first," according to Spellings.

These measures could mean that several nonprofits and other lenders that haven't had enough up-front funds to participate in ECASLA could re-enter the market using loans disbursed in previous academic years.

The Department will purchase loans at 97 percent of the principal and interest of the loan. The Department anticipates purchasing up to $500 million in loans each week, up to an aggregate of $6.5 billion during the designated period. Loans sold to the Department will be serviced by the Direct Loan Servicer. Lenders will not be able to repurchase loans that have been sold to the Department.

In a letter to financial aid adminsitrators yesterday, the loan community said these new measures will allow students and parents to "enjoy the high level of service and effective default prevention ptorams offered by FFELP lenders and guaranty agencies."

"Despite unprecedented market turbulence, FFELP has continued to serve the vast majority of higher education institutions - 75 percent, according to the most recent figures from the Department of Education," the letter states.

These additional liquidity measures indicate an increased anxiety in the Department about the availability of FFELP loans into the future. A further indication is a November 7 letter from Education Secretary Margaret Spellings to Senator Edward Kennedy, chairman of the Senate Education Committee, requesting "prompt action" to alter the subsidization formula the Department currently uses to subsidize lenders.

The letter explained that the cost of financing loans compared to the federal subsidy they receive is so great that continuing to make loans becomes unviable for lenders. The cost is high because the Department is required to use the commercial paper (CP) rate when figuring out subsidy rates that are paid to student loan providers. But lenders fund their loans using the London Interbank Offered Rate (LIBOR). Historically those two rates have been close, with the CP rate generally being slightly lower than the LIBOR rate. But with recent actions taken by the Federal Reserve in response to worsening market conditions, the LIBOR rate has far exceeded the CP rate.

In the November 7 letter, Spellings asked Kennedy to temporarily establish an "interim substitute rate" for the CP rate currently in use. This would allow lenders to better predict the cost of funding student loans, according to Spellings.

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