WASHINGTON - Student loan lenders squeezed by the credit crunch expressed mixed views yesterday about a proposal in which the Department of Education will advance lenders money on a short-term basis to originate new loans if they are otherwise unable to access capital. If lenders remain unable to issue debt backed by the loans they originate, the department will agree to purchase them through September 2009.

Though lenders were quick to laud the Education Department for acting quickly to try to prevent a student lending crisis, they were skeptical of the proposal to give the department servicing rights on the loans it purchases.

If nothing else, the lenders argued, separating the originators of loans from their servicers could lead to confusion for students with multiple loans from multiple originators. Among other things, loan servicers are responsible for collecting loan payments and sending notices to students regarding their loans, they said.

"Although our members are somewhat encouraged by the department's announcement, and its potential for preventing a shortage of loan capital this fall, serious questions remain," said Peter Warren, senior vice president of government relations at the Education Finance Council, which represents about 35 state agencies and nonprofits that originate loans through the Federal Family Education Loan, program. "We believe it is important that lenders retain the servicing rights to loans that are sold to the department in order to prevent potentially millions of students with multiple loans from being forced to deal with multiple loan servicers."

Ellis Treadway, executive vice president of the Waco, Tex.-based Brazos Higher Education Service Corp., the largest not-for-profit holder of student loans, said that there were many default problems in the late 1980s and early 1990s because students had loans that were "scattered everywhere." Despite his concerns over the servicing component, Treadway said the overall proposal is "a good first step."

Sara Martinez Tucker, undersecretary of education, said in a conference call with reporters yesterday that the department decided to maintain servicing rights on the loans it purchases in order to "get our arms around what we own."

"To the extent that we purchase an asset ... we have a responsibility to ensure that we are able to monitor everything around that asset and to ensure that we are compliant with any of the regulations that apply to federal assets," she said.

Still, it remained unclear if the roughly 90 lenders who have exited or suspended participation in the FFEL program will resume lending under the conditions set forth by the department. Albert Lord, chief executive officer of Sallie Mae, the largest FFEL loan originator, said in a conference call yesterday that the lender will remain in the program. But, he said, the economic terms of the proposal are "barely OK."

Though the department said it will soon publish more detailed terms and conditions on which it will purchase FFEL loans originated for the coming academic year, a letter from Education Secretary Margaret Spellings to FFEL lenders released yesterday indicated that the department will purchase "eligible" loans at a price equal to the par value of the loan, plus any accrued interest. In addition, the department will reimburse the lender for a 1% origination fee that is paid to the department and will also pay the lender $75 per loan to defray its administrative costs.

The department's proposal for advancing lenders money to originate loans is complex, but essentially the advances are loans that will carry an interest rate equal to the prevailing commercial paper rate plus 50 basis points, sources said. Spellings cautioned FFEL lenders in the letter that the terms of such liquidity may involve "different parameters" to assure that there is no net cost to taxpayers, as required by legislation Congress rushed to pass earlier this month that authorized the liquidity facility.

To further guard against a student lending crisis, the letter said the department is ramping up its "lender of last resort" program for students and universities that are unable to secure lending, and is also taking steps to double the capacity of its direct lending program to $30 billion.

In a joint statement with Treasury Secretary Henry Paulson, Spellings said: "We hope families will be reassured that the U.S. Departments of Education and Treasury are acting to ensure loans remain accessible. At the same time, while offering these short-term solutions, we can also consider this a teachable moment that speak to broader, long-term flaws in our complex and outdated financial system. This system has been crying out for reform for years, and especially in light of the ever-increasing cost higher education, students and families are counting on us to provide it."


Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.