The Education Department was expected to meet with a large group of student loan lenders yesterday to unveil the terms under which the department will purchase their loans using new legal authority that was signed into law May 7, said sources who planned to attend the meeting.
At the meeting, which was to be held at the end of the day, the department was expected to outline at least three conditions under which it will purchase loans originated through the Federal Family Education Loan, or FFEL, program, to mitigate a looming lending crisis.
In one scenario that appears to most apply to the issuers of municipal securities backed by student loans, the Education Department may sell issuers standby purchase agreements, sources said before the meeting yesterday.
Under such agreements, the department would agree to purchase the securities in the event that the buyers of the securities wanted to sell them but were unable to, the sources said. The Education Department is still negotiating the fees the issuers would pay for the agreements, they added.
The department may also be considering a temporary put option under which the lender could sell the loans to the Education Department once they have been originated.
Another longer term option would entail the Education Department advancing money to the lenders ahead of the origination of the loans, in a liquidity conduit financed with Treasury borrowing, the sources said. They stressed that it was not clear if the department would try to implement each option and what the specific terms would be.
Earlier this month Congress quickly passed, and President Bush signed into law, legislation that allowed the Education Department to temporarily purchase loans from FFEL lenders. In addition, the measure expanded an existing department-run "lender of last resort" program to include schools, in addition to individual students, that can demonstrate they are unable to otherwise secure lending. The legislation also increased the total amount of federally backed student loans that parents can borrow for their children.
The Education Department acted quickly to issue new guidelines for its lender-of-last-resort program and lawmakers have urged it and the Treasury Department to implement the other provisions in the new legislation by Memorial Day, warning that the student loan crisis is not yet fixed.
"The administration must act before Memorial Day in order to prepare for the peak lending season this fall," Rep. Paul Kanjorski, D-Pa., wrote in a letter to Education Secretary Margaret Spellings and Treasury Secretary Henry Paulson on Monday. "Students must have every opportunity to further their education, and it would be irresponsible for the administration to allow anyone to drop out of school because the administration did not act quickly enough to implement the law."
Education and Treasury department officials did not return phone calls seeking comment yesterday.
Under the FFEL program, which is favored over direct federal lending by more than 80% of colleges and universities, state agencies and 501(c)(3) organizations may issue tax-exempt and taxable debt backed by the loans.
Last year, FFEL lenders sold about $60 billion of student-loan related securities, of which roughly 20% were tax-exempt and issued by state-level agencies and nonprofits. But since the beginning of the year, new issuance has evaporated as nearly 70 FFEL lenders and 25 private student loan lenders have suspended their lending activities, according to FinAid.org.
One reason FFEL lending has plummeted is because a new law that went into effect last fall halved the interest rates on certain FFEL program loans. Another reason is related to the ongoing credit crunch, which has elevated borrowing costs for lenders. The combination of lower yields that FFEL lenders receive with the sharply higher borrowing costs has squeezed many issuers out of the market.
