Student lenders to get federal help

Government to buy some loans, freeing capital for others

May 22, 2008|By Kathy M. Kristof | Kathy M. Kristof,LOS ANGELES TIMES

In an effort to head off a threatened crisis in student loan availability, the federal government will buy loans from lenders, double the amount of loans it writes directly and bolster a "lender of last resort" program that helps low-income students finance college.

The moves announced yesterday are aimed at reassuring lenders that they will have ready access to cash throughout the 2008-2009 college year, at a time when the financial markets have gone moribund.

"We want students to be able to concentrate on their studies rather than worry about disruptions in the student loan market and whether they will be able to obtain federal loans to help pay for school," Secretary of Education Margaret Spellings said in a statement. "We hope families will be reassured that the U.S. Departments of Education and Treasury are acting to ensure loans remain accessible."

The Department of Education gained authority to buy loans and increase liquidity in the student loan market through the Ensuring Continued Access to Student Loans Act of 2008, which Congress passed this month. The law also boosts the amount of money that students can borrow each year under the federal student loan program.

Meetings held

The Department of Education, charged with implementing the law, held more than 100 meetings with lenders and government attorneys over the past three weeks to come up with the strategy unveiled yesterday.

Time was of the essence because roughly 80 lenders have pulled out of the student loan market in the past three months and several major players, including market leader Sallie Mae, had been threatening to do so.

Industry experts were concerned that further defections would leave students scrambling when classes started in September. The department has now assured both lenders and consumers that the credit crisis will not upend the coming school year, with the government effectively pouring cash into the loan market for the next 12 months, hoping that the credit markets recover next year.

Short-term solution

"I would commend them on their speed and creativity in developing this short-term solution," said Robert Shireman, director of the Project on Student Debt in Berkeley, Calif. "It provides lenders with the same or similar access to funds that they had before the credit crisis, so that for at least the next year, they will be able to make student loans like they did in the past."

In a conference call with school customers yesterday, Sallie Mae reassured school financial aid officers that it would continue to write new loans at least for the near future.

"Sallie Mae will continue lending without breaking stride," said Albert L. Lord, chairman and CEO of Sallie Mae.

Bob Murray, spokesman for USA Funds, the nation's largest student loan guarantor, called yesterday's announcement "critical."

"Lenders are still waiting to hear some of the details, but this appears to be a positive step forward," he said.

Kathy M. Kristof writes for the Los Angeles Times. The Associated Press contributed to this article.

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