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Apr-18-2008Congress moves to calm student loan turmoil(topic overview)
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Private lenders prefer Dodd's solution. The banks say that the Miller-Kennedy proposal won't work because they would have to sell their existing loans at a loss to gain funding to make new loans. "We would prefer the administration to use its existing authority and work with the Federal Financing Bank to provide more liquidity," said Kevin Bruns, executive director of American Student Loan Providers, a coalition of 80 lenders involved in the federally backed loan program. Financial aid experts said Miller's bill would help students by raising the aggregate loan limits - the total amount borrowed over the course of a student's education - to $31,000 for undergraduates who are dependents of their parents, and $57,500 for undergraduates who are not claimed as dependents. The more students can borrow in federally backed loans with fixed interest rates, the less they have to depend on other loans with higher rates. To help struggling parents, Miller's bill also would give them more time before they have to start paying off their federal PLUS parental loans - allowing them six months after their children leave school rather than the current 60 days. The bill would allow parents to qualify for those loans even if they had been late for three months on their mortgage payments or medical bills. "Those are wonderful actions that would really help students and families right now," Resh of UC Berkeley said. [1] The lender of last resort program is untested, and the state guaranty agencies are not in the business of making loans, lobbyists said. It is not clear whether lenders strapped for capital will readily sell their loans to the Department of Education. Lobbyists for lenders said that it may not be profitable for them to do so, citing a provision of the bill that says the Education secretary can only buy the loans if they are at no extra cost to the government. Lenders are pushing a different fix they say wouldn't require congressional action: having the Federal Financing Bank (FFB), which is overseen by the Treasury, advance lenders funds backed by student loans. "It's an immediate solution," said Kevin Bruns, the executive director of America's Student Loan Providers. The idea got a boost this week when Senate Banking Committee Chairman Chris Dodd (D-Conn.) wrote a letter to Treasury Secretary Henry Paulson urging him to use the FFB to provide liquidity to the student loan market. He also wrote to Federal Reserve Chairman Ben Bernanke, asking him to use his authority to ensure access to loans. The chairman of the House Financial Services Subcommittee on Capital Markets, Rep. Paul Kanjorksi (D-Pa.), wrote to Paulson and Education Secretary Margaret Spellings in February, asking them to consider several forms of federal financing, including advances from the FFB, to shore up capital to student lenders.[2] The legislation calls on federal financial institutions, including the Treasury Department's Federal Financing Bank, to pump liquidity into the student loan market. It would also let the Department of Education buy federally guaranteed student loans from lenders unable to sell them on the largely inactive secondary market, and funnel loan capital to colleges through state guaranty agencies. A similar bill is pending in the Senate.[3]
The student loan business is in disarray because of fallout from the subprime mortgage crisis, as well as deep cuts in federal subsidies paid to federally guaranteed student loan providers that were approved last year by Congress. The House bill would also let the Education Department buy federal student loans from lenders unable to sell them on the largely paralyzed secondary market, and funnel loan capital to colleges through state guaranty agencies.[4]
WASHINGTON -- A credit crunch affecting federally guaranteed student loans is pushing Congress to help shore up the stricken market. The House is voting Thursday on legislation that would give the Education Department temporary authority to buy loans from student lenders to ensure their access to capital.[5] The House on Thursday passed legislation intended to ensure that students can get federally backed loans for school this fall, as lenders faced more bad news. The 383-27 vote came a day after Sallie Mae, the nation'''s largest student lender, announced it lost $104 million in the first quarter, and said almost all its new loans will be made at a loss. JP Morgan/Chase and Citigroup have also said they will be more selective in the schools to which they lend, likely meaning they will back away from schools with high default rates ''' most frequently community colleges, schools that historically serve minorities and others that educate many people from low-income backgrounds. At least 57 lenders have already dropped out of the federally backed Federal Family Education Loan program this year, driven away by the credit crunch, which has essentially frozen sales of packaged loans on the secondary market. Sallie Mae has said its application for new loans were up roughly 20 percent from last year, as students who previously used other lenders turned to it for help.[6] WASHINGTON ' Students could borrow more through the federal guaranteed college loan program and private lenders could get federal help in raising cash to make student loans under House legislation passed today. The Ensuring Continued Access to Student Loans Act is the latest response by lawmakers to fears that ripple effects from a troubled mortgage industry could make it harder for college students or their families to get federally backed loans.[7]
The student lending industry and investors are pressing Congress for help, and Democratic leaders say a potential crisis in access to money for education should be averted by government action in the way that the mortgage foreclosure disaster was not. Without government help, "we're looking at a material shortfall in access to student loans this year," John Remondi, the chief financial officer of Sallie Mae, the nation's largest student lender, testified at a Senate hearing Tuesday. Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, said at the hearing he would ask Treasury Secretary Henry Paulson to consider using a Treasury financing agency to pump cash into the student loan market so lenders will make new federally backed loans.[5] President Bush's education secretary, Margaret Spellings, had already begun contingency planning in case more lenders drop out. Her plan would send funds to a few dozen lenders to make sure all students continue to get the federally backed loans. The Miller-Kennedy measure would give her additional authority to start buying up existing loans. Sen. Chris Dodd, D-Conn., who chairs the Senate Banking, Housing and Urban Affairs Committee, has said he's not sure the bill can be passed quickly enough to make a difference. He wants Congress to direct the Treasury Department's Federal Financing Bank to lend banks money to make student loans.[1] The House of Representatives overwhelmingly approved a bill to direct federal financial institutions, including the Treasury Department's Federal Financing Bank, to ensure enough money is available to provide student loans.[4]
The House bill, sponsored by Education and Labor Chairman George Miller, D-Calif., would authorize the Education Department to purchase student loans at a discount, increasing liquidity, and it would raise the limits on how much students can borrow in federally backed loans. Those loans carry lower interest rates than private loans. The bill would allow undergraduates who are dependents of their parents to borrow up to $31,000 in federal loans, up from a current limit of $23,000.[6] Baird analyst Amy Junker says the bill will help ease turmoil in the student loan market by increasing access to federal loans, primarily by expanding annual loan limits and by allowing the Department of Education to buy federally backed loans from lenders that need new capital in order to stay in business.[8]
The measure would give the Education Department temporary authority to buy existing student loans at a discount to give lenders more cash for new loans. It would also allow the Education secretary to send federal money to certain guarantee agencies, allowing them to act as "lenders of last resort" to make new federally backed loans.[9] Wisconsin Rep. Tom Petri expressed concern about a provision that would take effect if more private lenders drop out of the student loan program. The legislation would give the Education Department emergency power to advance money to guarantee student loan agencies such as College Assist ' which insure student loans but normally don't make loans ' to serve as lenders-of-last-resort for colleges. Petri, R-Fond du Lac, and student groups worry that guarantee agencies might use the federal money to provide kickbacks or other incentives to colleges and universities to steer students to them.[7] The bill says short-term delinquencies in mortgage or medical payments should not prevent otherwise eligible parents from borrowing money for college. The legislation would give the Education Department authority to buy up loans from student lenders to ensure they have access to capital and can keep issuing loans. Lenders, and some lawmakers, say more action is needed in this area.[10]
Lawmakers are worried enough that the House on Thursday passed a bill to give the Department of Education temporary authority to buy up existing student loans, which could free up money for lenders to make new loans.[1] Borrowers must now start repaying the loan within 60 days after it is issued. The bill would give the Education Department the power to aid lenders by buying their student loans at discount to provide cash lenders could use to make new loans.[7]
Dozens of lenders, making up an estimated 13 percent of the market, recently stopped making loans under the federal student loan program, in which the government subsidizes and backs low-interest loans. The departure of those lenders hasn't resulted in students being shut out of the program. Other lenders have stepped in, or the students have received loans through a smaller program in which the Education Department makes the loans directly to students. Some students relying on private loans, which are not federally backed and can carry high interest rates, have had trouble getting those nonfederal loans.[10] Sen. Edward Kennedy (D-Mass.), chairman of the Senate Health, Education, Labor and Pensions (HELP) Committee, plans to mark up a very similar bill. Kennedy this week called on schools to consider switching from the private FFEL lenders to the direct loan program, saying it "provides a stable and efficient way for all students -- regardless of the institution they attend -- to receive federally guaranteed student loans." In a letter to David Ward, the American Council on Education president, Kennedy wrote that he has urged Spellings to make it as easy as possible for institutions to switch to the direct loan program. Kennedy sent a letter to nearly 100 Massachusetts colleges and universities suggesting they register for the direct loan program, even if they don't intend to offer it to students just yet.[2] Students have not seen the impact yet. A few private lenders are stepping up their lending to fill the void and boost their market share. Some affected schools are turning to the Education Department's direct loan program, which provides $12 billion in loans annually directly to students through their schools. "To me, this is a lender crisis, not a student crisis," said Cheryl Resh, UC Berkeley's director of financial aid, who said Cal students have not been impacted because of the school's direct loan program.[1] Education lobbyists doubt that the direct loan program, which accounts for 20 percent of student loan volume, could scale up rapidly if private lenders fled the market. It was "simply not realistic" for the Department of Education to quickly ramp up to 50 percent of loan volume, Miller said.[2]
The Department of Education did not respond to a request for comment by press time. Lenders say that their situation is worsening. More than 40 have stopped lending under the Federal Family Education Loan (FFEL) Program, which provides government-backed loans to students, according to a tally compiled by NASFAA. Meanwhile, 12 have suspended private student loans altogether, including Bank of America, which said it would stop making such loans.[2]
At the hearing, Sen. Christopher J. Dodd (D-Conn.) suggested immediate steps to address the potential crisis. He called on the government to instruct the Treasury Department's Federal Financing Bank to give banks more money for student loans.[9] The FFB proposal was discussed at a recent meeting between Paulson and Spellings, according to a student lender lobbyist. The administration officials haven't yet signaled whether they would go further than that. A spokeswoman for the Treasury, Jennifer Zuccarelli, declined to comment on the proposal, saying only that the Treasury and the Department of Education "were following the issue closely to ensure that federal student aid, both grants and loans, remains available to all eligible students."[2]
NEW YORK -- Shares of for-profit education companies were mixed Thursday, after the U.S. House of Representatives backed a measure to help students get college loans in times of tighter credit. The legislation was passed to help boost liquidity in the student loan market, as students are starting to compile financial aid packages before heading off to college this fall.[8] CAPITOL HILL (AP) -- With all of the turmoil in the credit markets, Congress is taking steps to make sure students can still get college loans. The House today backed a measure aimed at keeping those loans available, amid worries that the tightening credit markets could limit financial aid for students.[11] WASHINGTON -- In a bid to keep the global credit crunch from cutting into financial aid for college students, the House overwhelmingly approved a bill Thursday to expand access to federally backed loans.[9] The bill passed in the House on Thursday is similar to legislation introduced in the Senate by Sen. Edward Kennedy, D-Mass., chairman of the Senate Education Committee. Students are just starting to line up financial aid packages for college this fall. Experts say the impact of the credit crunch on the student lending market probably won't be entirely clear until this summer.[10] Passage of the bill on a 383-27 vote comes as worries mount that the tightening credit markets, stemming from the subprime mortgage crisis, could limit financial aid for students. "Families deserve every assurance that we are doing what we can to make sure that they will continue to be able to finance their children's college education, regardless of what happens in the credit markets," said Rep. George Miller, D-Calif., who chairs the House education committee.[10]
The bill sponsored by California Reps. George Miller, the Democratic chairman of the House Education and Labor Committee, and Howard McKeon, the panel's senior Republican, also would let the education secretary advance federal money to designated companies that would operate as "lenders of last resort" if they run out of capital to make new federally backed loans.[5] The bill also would allow the education secretary to advance money to guaranty agencies - state or private entities that insure federal loans - which could serve as lenders of last resort if more private lenders bail out. "Now more than ever, families deserve every assurance that we are doing all that we can to make sure that they will continue to be able to finance their children's college education regardless of what happens in the credit markets," said Rep. George Miller, D-Martinez, the chief sponsor of the measure.[1] The bill would also bolster state agencies' ability to step in as lenders of last resort in cases where private lenders are unable to satisfy the demand. It would increase the limits on unsubsidized Stafford loans so that students wouldn't have to rely as much on costlier private loans.[2]
The exiting lenders, which include college loan agencies in several states, account for around 13 percent of the federally backed student loan market, according to FinAid.org, a Web site focused on student lending.[5] Some have urged Treasury Secretary Henry Paulson to consider using a Treasury financing agency to pump cash into the student loan market so lenders will make new federally backed loans.[10]
Scores of student lenders have yanked back on loans -- or fled the business altogether -- since Congress and the Bush administration slashed subsidies on federally backed loans last year and tightened credit markets have increased capital costs.[2]
Some education officials, however, worry that increased limits could cost students more in the long run. "We believe an increase to the aggregate loan limit at this time is a misguided policy that will have long-term negative, unintended consequences," Constantine W. Curris, president of the American Assn. of State Colleges and Universities, wrote to Kennedy in a letter. "While undoubtedly born from good intent, this proposal would in fact facilitate major tuition increases and result in even greater student debt." The legislation would also allow parents to defer repayment of federally guaranteed loans for up to six months after their children leave school, as well as increase the circumstances in which parents with an adverse credit history are eligible to receive loans.[9] The legislation cleared the committee last week on a unanimous vote. A similar measure is pending in the Senate. _Give parent borrowers more time _ up to six months after children graduate _ to begin repaying the federally guaranteed loans known as PLUS loans that allow them to borrow up to the full cost of attendance, including room and board and books. _Temporarily classify as an emergency circumstance delinquencies on home mortgages of up to 180 days, enabling parents in that situation who have a negative credit history, and would therefore be ineligible, to take out PLUS loans for their children's education.[5]
The credit crunch roiling the financial markets is starting to hit college campuses as dozens of lenders - comprising at least 13 percent of the student loan market - have stopped offering federally guaranteed student loans over the last few weeks.[1] More than 50 student lenders have stopped making federally guaranteed student loans, either temporarily or permanently.[5]
John Remondi, chief financial officer of Sallie Mae, the nation's largest student lender, testified at a Senate hearing Tuesday that the U.S. was "facing a scenario where demand for student loans will significantly outstrip supply." He added that without government help, the industry would have a "material shortfall" in student loan access this year.[9] Lobbyists for lenders and schools worry that the fix could get bogged down in the Senate, failing to help lenders in time to meet the surging demand for loans in the coming months. "If this goes through a long legislative process, the fact is it's going to be too little, too late," said Philip Day, the president of the National Association of Student Financial Aid Administrators (NASFAA).[2]
"As far as we're concerned, direct loan is a real option for schools that are concerned." San Francisco State University is also a direct loan school and has seen no immediate impact, but the school's director of financial aid, Barbara Hubler, said she worries it could affect students who also have to take out private loans. "We might not be getting the feedback from students until later this summer, when they try to get those loans and they find it's harder to do so," Hubler said.[1]
Financial aid counselors at most Wisconsin colleges and universities have not heard of students having a tougher time getting loans, said Ernesto Monge, the federal issues chairman for the Wisconsin Association of Student Financial Aid Administrators.[7]
Monge and Lawson said college loans are fact of life ' a federal study pegged average undergraduate student debt at $19,237 in the 2003-2004 academic year. Both said the House bill would help students by raising the annual amount a student can borrow by $2,000.[7] WASHINGTON (Reuters) - The House of Representatives on Thursday approved a bill calling for federal intervention to stabilize the $85 billion student loan market amid turmoil brought on by the subprime mortgage crisis.[3]
The House bill seeks to address that problem by raising limits on how much borrowers can receive under the federal program. The bill also tries to encourage parents to take out federal loans for their children's education. The bill would allow parents to defer repayment of those loans until after their children leave school, which is currently not allowed.[10]
"We're not waiting for a problem to develop," said Miller, chairman of the House Education and Labor Committee. "The unprecedented nature of the season in the credit markets has spilled over, to some extent, into the student loan market, as institutions have tried to recapitalize their ability to make future loans.[9] The House on Thursday moved to create a temporary safety net for student lenders currently squeezed by the credit crunch, as many fear education loans could dry up for the college-bound this fall.[2]
WASHINGTON (AP) — The House on Thursday backed a measure aimed at ensuring that students get college loans amid the turmoil in the credit markets.[10]
Sallie Mae, the nation's largest student lender, says it is losing money on new loans. It's not clear whether their departure signals a permanent trend that could make it tougher for students or their parents to get college loans this fall.[7] Sallie Mae, the nation's biggest student lender, said last week it will no longer make consolidated loans, which pull together all of a student's college debts.[1]
Cuts in subsidies to student lenders, approved by Congress last fall, also have made federal student loans less profitable. 57 lenders are getting out of the business, including such big banks as Washington Mutual and HSBC Bank. Citigroup's Student Loan Corp. will stop issuing loans May 1 at certain colleges where it's no longer profitable, often because of low graduation or high default rates.[1] Kanjorski has also introduced a bill that would allow the 12 Federal Home Loan Banks to advance funds to student lenders.[2]
Fifty-seven lenders have left the federal loan program because a tightening credit market has made investors wary of buying securities the companies sold to provide cash for student loans.[7] The exodus of lenders is the latest side effect of the mortgage crisis. Investors, wary from the losses they've suffered in mortgage securities, are now balking at buying student loans, making it tougher for lenders to raise the cash they need to offer new loans.[1] Four state agencies have also quit advancing new loans to students. Banks, under these circumstances, may sell bundled student loans at a loss, just to step away from the business.[12] The credit crisis has pulled the rug out from under the student loan business, making capital for new loans hard to find.[12]
Legislators are considering a variety of fixes. One is to give the Education Department permission to buy loans, which would infuse capital into the student loan market.[12] House lawmakers on Thursday overwhelmingly approved legislation that would temporarily allow the Department of Education to buy federally backed loans from providers that are unable to raise capital.[2]
Students with poor credit history are likely to find it tougher to get federally guaranteed loans, which have a fixed interest rate lower than most private loans.[1] Underscoring the urgency, Bank of America Corp said on Thursday it would no longer offer private student loans in the coming academic year.[4] _Increase from $23,000 to $31,000 the total amount of federal student loans that dependent students can receive to pay for college. The subprime mortgage crisis has shaken the market for student loans in recent months, just when students headed to college next year must begin to lock in their loans.[5] WASHINGTON (Reuters) - The U.S. Congress moved closer on Thursday to putting a government safety net under the $85 billion student loan market as millions of young people make preparations to head to college in the autumn.[4]
The bill also increases the aggregate loan limits for students. Students who are dependents of their parents would be able to borrow up to $31,000, an increase from $23,000, and the independent-student limit would rise from $46,000 to $57,500.[9] Parents who are less than 180 days delinquent on mortgage payments could still qualify for the Parent Loans for Undergraduate Students (PLUS) program.[7] The legislation would change the Parent Loans for Undergraduate Students (PLUS) to allow parents to delay repayment until six months after a student graduates.[7]
Student loan giant SLM Corp., known as Sallie Mae, said on Thursday that it would record a loss in the first quarter. JP Morgan Chase and Citigroup announced this week that they would stop making loans to some students and schools without giving details. "We think that's code for schools with large low-income and minority populations," said Miller, who says the bulk of his members serve such students.[2] WASHINGTON, April 17 (UPI) -- Hedge fund managers are turning their attention to congressional attempts in Washington to fix the struggling student loan business, analysts said.[12]
Cedric Lawson, legislative affairs director for the United Council of UW Students, said lawmakers should focus less on loans and more on putting money into grants that students don't have to repay.[7] Alarm is growing on Capitol Hill as lawmakers dread the prospect of students unable to get loans during an election year.[2]
Dozens of lenders have exited the federal loan program altogether since the cuts in subsidies, prompting some analysts to predict a shakeout of smaller competitors and growth for larger players.[4] Bank of America said Thursday it plans to join the ranks of lenders that have stopped issuing private loans, though it plans to continue making government-backed loans.[10]
The total for independent students would increase from $46,000 to $57,500. The measure also would expressly authorize the department to advance funds to guarantee agencies, allowing them to act as lenders of last resort if more private lenders drop out.[6] The chief executive of Sallie Mae, the largest student lender, said the system was in for "something of a train wreck" by mid-2008 if the federal government did not move quickly with a stabilization plan.[4]
Miller said the bill would ensure that students can pay for college '''regardless of what happens in the credit market.''' In the Senate, Edward M. Kennedy, D-Mass., has introduced a similar bill, which he is working to get through that chamber as quickly as possible. [6] Sen. Edward Kennedy, chairman of the Senate education committee, has introduced a bill similar to the House bill.[7] Sen. Ted Kennedy, D-Mass., who chairs the Senate Health, Education, Labor and Pensions Committee, is pushing a companion bill that's seen as likely to draw similar support.[1]
Miller's bill was largely backed by the White House and passed on a 383-27 vote. [1] The House accepted by voice vote a Petri amendment requiring the Education Department to police the agencies.[7]
The measure, approved 383 to 27, aims to ensure that college students get aid amid credit market turmoil. [9] Dodd said it would be "almost miraculous" for the current legislation to be cleared in time to make a difference for students who plan to attend college in September.[9]
'We really, up to now, have not seen a shortage or predict a shortage of loan money from the federal sources,' Monge said. [7] Day, of NASFAA, noted that it was "not exactly easy" to switch to direct lending, in part because the schools most vulnerable to losing access to loans have the least resources to devote to the transition.[2]
SOURCES
1. Credit crunch now hitting student loans
2. TheHill.com - Reprieve for student lenders moves to Senate
3. House backs intervention in student loan market | Reuters
4. Congress moves to calm student loan turmoil | U.S. | Reuters
5. Ahead of the Bell: Student loan aid | Chron.com - Houston Chronicle
6. CQ Politics | House Passes Bill To Head Off Student Loan Crisis
7. Green Bay Press-Gazette - House backs help for student lenders
8. Closing Glance: Education stocks trade mixed on legislation | Chron.com - Houston Chronicle
9. House backs bill to boost student loans - Los Angeles Times
10. The Associated Press: Congress acts to boost student lending
11. WTTE FOX 28 - National News
12. Hedge funds studying student loans - UPI.com
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