Liquidity Lift For Higher Ed Loans

WASHINGTON - The Department of Education plans to provide liquidity support to the student loan market through a new commercial paper conduit facility for the purchase of loans made as far back as October 2003, and also plans to renew a high-profile student loan liquidity program for an additional academic year.

The announcements from the department on Saturday are the latest developments in a series of programs the federal government has unveiled following the passage of the Ensuring Continued Access to Student Loans Act, or ECASLA, in May to assist non-bank lenders in financing student loans. Officials said yesterday that there were hundreds of billions of dollars of student loans eligible for the programs.

Under a DOE program authorized by the legislation, the lenders can either sell loans directly to the department or tap liquidity through a cumbersome, short-term "participation program," which the DOE said it would "replicate" for the 2009-2010 academic year that officially begins on July 1.

In addition, the DOE announced Saturday that it would provide liquidity support under "one or more" new commercial-paper conduit facilities designed to purchase and provide longer-term financing for private student loans.

While DOE officials said yesterday that the details of the conduits would be released by the end of the year, all loans made through the Federal Family Education Loan, or FFEL, program, between Oct. 1, 2003, and July 1, 2009, would be eligible for inclusion. The CP conduits will be privately run and the loans sold to them will be backed by a standby purchase agreement from the DOE.

"Support for the program will come from the Department of Education, which will enter into a forward commitment to purchase eligible student loans from the conduit in the future at a prearranged price," the department said in a statement. "These programs will protect taxpayers by ensuring there is no net cost to the federal government."

While the actions are geared toward ensuring that there are plenty of student loans available from private lenders next year, in creating the CP conduits, the DOE is providing an additional financing facility to lenders that already have access to short-term warehouse lines of credit but are unable to securitize their existing loans. Using proceeds from sales of the loans to the CP facility, lenders will be able to pay off their warehouse letters of credit, sources said.

But state-level nonprofit lenders that issue tax-exempt student loan debt - many of which do not have warehouse LOCs - said yesterday that the department's measures would only have a marginal impact on their operations.

The reasons are complex, but largely revolve around the auction-rate securities market, which collapsed in February. Student loan lenders squeezed by the financial crises are still struggling with large portfolios of illiquid ARS, the underlying collateral for which is largely comprised of so-called consolidated loans. But under the terms of ECASLA, the department cannot purchase bonds or consolidated loans, which are created by bundling together multiple loans taken out by an individual borrower over the course of his or her academic career.

Don Vickers, president of the Vermont Student Assistance Corp., said that 40% to 70% of nonprofit lenders' loans are consolidated loans.

"It's great that they're doing this, but the biggest problem is that they can't buy consolidation loans and for most of us, our loans are consolidation loans," he said, adding that he has more than $1.7 billion of failed ARS.

Peter Warren, executive vice president of the Education Finance Council, which represents nonprofit student loan lenders, said the programs will be "of marginal help to nonprofits since it does not directly address the $80 billion in old loans tied up in illiquid auction-rate securities."

Warren urged the Treasury Department to consider using its authority under the recently enacted $700 billion bailout package to provide standby liquidity facilities for student-loan issuers that are still trying to convert their auction-rate securities to variable-rate demand obligations.

"The tool that can readily address the student loan ARS problem is in the hands of the Treasury Department, not the Education Department," he said.

The EFC, along with the Regional Bond Dealers Association, sent a five-page letter to Treasury two weeks ago calling for them to consider providing a liquidity backstop for VRDOs under their new authority to purchase or commit to purchase "troubled assets" that Congress gave the department in the bailout legislation. But Warren said yesterday that they had yet to receive a response from Treasury.

For the past year, FFEL lenders have been squeezed by a combination of lower yields that Congress has allowed them to receive on their loans as well as sharply higher borrowing costs.

Nonetheless, the DOE said that the FFEL, as well as its direct lending program, saw overall increases in lending over the past year. FFEL lending rose to $41.8 billion this year from $39 billion last year, while the direct lending program rose to $17.9 billion to $12 billion over the same period.

Despite the fact that dozens of FFEL lenders have left program, the modest increase in FFEL loans is attributable to the fact that there's more demand for student loans overall, particularly in a bad economy, when more people go back to school, Warren said.

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