Congress urged to tackle student-loan squeeze

By Jessica Holzer

Lobbyists for student lenders and colleges are prodding Congress and the administration to consider bold steps to shore up the student loan market, citing worrying signs the credit crunch could dry up loans for the college-bound this fall.    

Student loan giant Sallie Mae, formally known as SLM Corp., started making the rounds on Capitol Hill a few weeks ago to alert lawmakers to problems in the auction-rate securities market, a crucial source of capital for student loans.  

{mosads}Since then, the situation has worsened as more than a dozen auctions for bonds backed by student loans have failed, including ones for securities backed by federally-subsidized loans. Private lenders, schools and state nonprofits that finance loans to students are sounding the alarm.

“Might the government have to step in? Absolutely,” said Harris Miller, president of the Career College Association, which represents for-profit institutions. “I don’t believe that George Miller [D-Calif.] or [Edward] Kennedy [D-Mass.] wants to be blamed for poor students not getting an education.”

 Student lenders rely heavily on securitization to raise capital. But as the sub-prime mortgage crisis has spilled over into other credit markets, investors in the roughly $80 billion worth of auction-rate securities backed by student loans have had trouble reselling their securities, making it difficult for student lenders to raise capital.

At the same time, providers of Federal Family Education Loans (FFEL) have seen their profits crimped after Congress and the administration slashed their subsidies last fall, driving several lenders from the program, including the seventh largest, College Loan Corporation.

This month, auction failures prompted the Michigan Student Loan Authority to halt loans under a program serving more than 100 Michigan colleges and universities. A similar state agency, the Iowa Student Loan Liquidity Corp., announced last week that it would have difficulty financing loans for the upcoming school year.

Citing the subsidy cuts, Sallie Mae and other lenders are pulling back from lending to some for-profit trade schools.

“Schools with low graduation rates are in a particular bind,” said Kevin Bruns, the executive director of America’s Student Loan Providers, a lender trade group.

Lawmakers are growing worried. The issue was raised in recent hearings on the economy in both the House and the Senate.

On Feb. 15, the chairman of the Financial Services Committee’s subcommittee on capital markets, Rep. Paul Kanjorski (D-Pa.), and 20 other Democrats wrote to Treasury Secretary Henry Paulson and Department of Education Secretary Margaret Spellings expressing their concern.

“We urge you to work without delay within your organizations and with appropriate federal financial institutions and overseers to address this problem before it significantly decreases access to higher education opportunities for students and their families,” they wrote.

“Unless quickly addressed,” they continued, the problem could “result in long-term financing disruptions for higher education opportunities.”

The ranking member and a senior Republican on the House Education and Labor Committee, Rep. Buck McKeon (R-Calif.) and Rep. Ric Keller (R-Fla.), also wrote on Feb. 15 to Spellings, saying they were pleased that she had “reached out to and will be meeting with others in the administration” to discuss the problem.

Neither the Treasury nor Sallie Mae responded to a request for comment.

Lawmakers are not pushing for any specific intervention by the administration, and so far none have advocated legislative action, according to several House aides. {mospagebreak}

The situation is not causing alarm in all quarters. A House aide noted that there have been more problems in the market for private student loans than for government-backed loans. “It’s important for students and families to know they will continue to be able to access all federal student loans they are eligible to receive,” the aide said.

Some Democratic supporters of the direct student loan program see the current turmoil as an opportunity for the government to expand its share of the student loan market.

{mosads}FFEL lenders provide 80 percent of all student loans, while direct student loans account for only 20 percent of the market.

Disruptions to the student loan market were so far “episodic” and a “trend worth following,” according to a Senate aide, who added that schools had other options to provide financing to their students.

“Even in a worst-case scenario, every college has the opportunity to switch out of FFEL and into the direct loan program,” the aide said.

Meanwhile, some stakeholders and lawmakers are increasingly focusing on “lender of last resort” authority as a solution in case the auction-rate securities market becomes further disrupted.

Under legislation passed in the 1990s, the Treasury can provide money to state guarantee agencies, bypassing Sallie Mae and other private lenders, if the student loan market seizes up and the direct loan program cannot pick up the slack quickly enough.

Sallie Mae and its allies are floating a different plan on Capitol Hill that would allow them to stay in the market, according to several House aides. Under that plan, the federal home loan bank system would inject liquidity into the market by buying up student loans and student loan securitizations — an unprecedented activity for the congressionally chartered cooperatives.

The 12 home loan banks are well capitalized and enjoy a triple-A credit rating. Since the sub-prime crisis erupted last summer, they have injected roughly $300 billion into the mortgage market through loans to their bank, thrift and credit union members.

The idea got a boost when Kanjorski listed the home loan banks, along with the Federal Financing Bank and the Federal Reserve System, as appropriate entities that could use their “existing authorities” to bring stability to the student loan market.

However, legislation may be necessary for the home loan banks to buy student loans or make advances to student lenders. At present, only regulated banks, thrifts and credit unions can do business with them. Non-bank student lenders like Sallie Mae and Nelnet are unregulated.

A spokesman for Federal Housing Finance Board Chairman Ronald A. Rosenfeld declined to comment on the idea, saying only that his boss “would consider proposals as they come in.”

A Department of Education official, Larry Warder, said the department is “closely monitoring the situation in the credit markets and its effect on the federal student loan programs.” He added that department officials “have also met with representatives of the lending community to discuss market conditions and their potential impact on students and families.”