The Department of Education yesterday announced that it will purchase student loans on a short-term basis that were issued for the 2007-2008 academic year, using untapped authority Congress granted it in legislation enacted in May.

By purchasing these additional loans from lenders, the DOE hopes that the lenders will be able to use the proceeds to pay off so-called warehouse loans that they tapped last year to originate loans. That in turn will free up capacity for making second disbursements for the current academic year and additional lending the following year.

The announcement is the second step the DOE has taken in as many weeks to ensure that students continue to have access to federally guaranteed loans made through the Federal Family Education Loan program. But it is unlikely to have a direct impact on nonprofit student loan FFEL lenders that sell tax-exempt bonds because few of these lenders have warehouse lines of credit.

The bulk of their existing loans are consolidated loans, which are excluded from the DOE purchasing program. Consolidated loans are created by bundling together multiple loans taken out by an individual borrowers over the course of their academic careers. But these loans were excluded from legislation signed into law that authorized the DOE to purchase loans issued by FFEL lenders.

Under the terms of this new program, the DOE would purchase up to $500 million of non-consolidated Stafford and PLUS loans each week that were originated for the 2007-2008 academic year. Prior to this month, the department had only agreed to purchase student loans sold for the 2008-2009 school year.

DOE officials said yesterday that lenders would have to transfer servicing rights on all of the loans that they sell to the department. But several FFEL lenders, who are reluctant to give up servicing rights, said that transferring them to the department would needlessly create complications for both lenders and the borrowers.

"This process would be a lot easier if the department would reconsider its decision and allow the loans to be serviced by the original lender," one industry source said.

The announcement comes after the DOE said earlier this month that it would provide a liquidity backstop for "one or more" student loan commercial paper conduits. The conduits, which will be privately run, will purchase loans made as far back as October 2003 and the loans sold to them will be backed by a standby purchase agreements from the DOE.

As private lenders work to establish the first conduit, the department said yesterday that it would agree to purchase loans originated for last year until either Feb. 29, 2009, or the date a conduit is operational.

It also said that it would cap the amount of last year's FFEL loans it purchases at $6.5 billion. That figure compares to roughly $35 billion out of about $55 billion of Stafford and PLUS loans originated last year that have not yet been consolidated, according to the department.

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