Last month the Department outlined terms and conditions under which it would purchase student loans from lenders to provide them additional liquidity to continue making FFELP loans. Yesterday, the Department came a step closer to codifying those terms and conditions by posting the notice that is to be published in an upcoming Federal Register.
The Ensuring Continued Access to Student Loans Act (ECASLA) gives the Secretary of Education authority to offer temporary liquidity to FFELP lenders at prices that will encourage their continued participation in FFELP and maximize student loan availability. The law also requires that the Department provide that liquidity at no net cost to the federal government. The Department, in consultation with the Secretary of Treasury and the Director of the Office of Management and Budget, is satisfied that these terms and conditions will accomplish all of those goals.
"After taking into account alternative market and lender behavior scenarios and appropriate risk factors, the Secretaries and Director determine that the Purchase Program and Participation Program are in the best interest of the United States and will result in no net cost to the Federal Government," the notice states.
Lenders may use the Department for liquidity in one of two ways.
Under the "Loan Participation Purchase Program," the Department will lend money to loan providers, which would allow lenders to continue making loans by using their own loan portfolios as collateral. Student loan providers would have until September 2009 to either pay off the Department's loan and retain the student loan asset or allow the Department to take possession of it entirely. If lenders sell participation interests in their loans under the Participation Program, they are charged CP plus 50 basis points.
Under the "Loan Purchase Commitment Program," the Department will purchase loans directly from lenders for a price that would total the value of the loan, the origination fees paid by the lender to the Department, plus a $75-per loan flat fee to cover origination and servicing costs.
The Secretaries and Director examined origination, servicing costs, and deconversion costs (i.e., the costs from moving a loan from one lender's servicing system to another servicing system) among several different types of lenders in putting together a package that would ensure continued lender participation. The Secretaries and Director believe that 50 basis points would offer most lenders with sufficient capital to continue their participation in FFELP.
In examining costs to the federal government, the Secretaries and the Director took into account administrative costs, borrower behavior, lender behavior, and various other risk factors in making sure that the terms and conditions would not result in any net cost to the Department that it would otherwise incur in administering the FFEL program.
Most loan providers believe the terms and conditions are workable. Since the Department first released details of these terms and conditions nearly a month ago, several lenders have either returned to the FFEL program or have recommitted to participate this upcoming academic year.
Additional Media Coverage
By Justin Draeger
NASFAA Associate Director for Communications
Posted 06/26/08 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.
