WASHINGTON - Student loan lenders squeezed by the credit crunch are increasingly anxious that they will be unable to secure liquidity to originate new loans for the academic year that began July 1 despite a high-profile plan by the Department of Education designed to assist non-bank lenders in financing loans.
The concerns - from some of the largest state agencies and nonprofits that issue tax-exempt bonds backed by student loans - come as the DOE has taken steps in the last week to finalize the details of a plan it unveiled in May in which it will agree to loan lenders money but only if they have already secured access to short-term "bridge loans" elsewhere.
Some details of the plan were published in the Federal Register last week and apply to lenders who participate in the Federal Family Education Loan program. In addition to providing liquidity, the department will agree to purchase the loans through September 2009 if lenders remain unable to issue debt backed by the loans they originate.
Though FFEL lenders had hoped that the DOE would essentially advance them funds through Treasury borrowing, the department has told lenders in recent weeks that it does not believe a bill rushed into law in early May gives them the authority to provide money to lenders that haven't already originated loans.
Instead of receiving advances from the department, the lenders will have to first borrow money from banks on a short-term, or bridge, basis, education department official said last week. Once they have tapped a line of credit and received bridge financing, the lenders can disburse their student loans, after which they will be eligible to borrow funds through the department once a week, via a "custodian."
Each week, the lender will have to provide the custodian with a roster of loans it had originated and the department will give the lender the money to fund those loans within seven to 10 business days. The lenders would then use the funds they borrow from the department to pay back their bridge loans.
"It's way more complex than it needs to be, and we haven't been able to line anything up yet," said Jamie Wolfe, chief financial officer for St. Paul-based NorthStar Education Finance Inc., one of the largest nonprofit lenders in the country that caters to graduate students. "The department's plan requires us to first get liquidity from someone else, but it is hard to come by today and we don't know how much we will need."
As lenders consider whether the economics of the plan will work for them, they have until July 16 to file letters of intent with the Education Department that include their estimated amount of borrowing from the agency. FFEL lenders said last week that they planned to file such letters even if they did not yet know whether they would actually borrow from the department.
"We're still studying it and trying to make it work, but the problem is we have to find liquidity in order to use their liquidity," said Ellis Tredway, executive vice president of Brazos Higher Education Service Corp., whose debt issuance wing was the largest issuer of tax-exempt student loan bonds between 1998 and the beginning of 2008, when it sold $14.15 billion of bonds.
Even if lenders are able to secure outside liquidity, officials at some student loan agencies said last week that the economics of the department's plan will prove challenging. It will be difficult to juggle the week-to-week changes in the volume of loan disbursements they will need to make, lenders say.
In addition, the ongoing market turmoil, combined with congressional mandates passed last year reducing the yields FFEL lenders receive , will make it difficult for the lenders to break even on loans they originate.
The DOE will require FFEL lenders to pay interest on its loans equivalent to the commercial paper rate plus 50 basis points, but, in light of the credit crunch, banks are charging much more for tapping short-term lines of credit, lender sources said last week.
A lender who asked not to be named said banks would probably charge close to commercial paper plus 100 basis points, which would leave some lenders with a spread of only 10 basis points between the rates they would owe their non-governmental liquidity providers and the rate the government allows them to make on some types of student loans. For instance, the federal government caps the interest lenders can earn on Stafford loans at commercial paper plus 110 basis points while student borrowers are in school.
In addition, lenders would also be required to borrow from banks much more than the principle amount of their student loans to cover, among other things, the 1% origination fee that the DOE charges for each student loan. If the lender ultimately chooses to sell the loans to the department, it will be reimbursed the origination fee, as well as any accrued interest on the loan in addition to its principle amount. But until then, many lenders will be faced with significant cash flow problems, they said.
"The government needs to provide us liquidity because where the markets are today, we cannot get funds at rates that make sense economically to make student loans," Wolfe said. "Last fall the government cut rates to a point that may have made sense then, but now that the marketplace is a whole lot worse, and it's impossible to fund student loans at those interest rates."
Though a DOE spokesman could not be reached by press time, John Dean, special counsel for the Consumer Bankers Association, which represents the largest depository banks participating in the FFEL program, said the department is working closely with FFEL lenders to resolve their concerns and is operating under the assumption that bridge financing will be available at an acceptable cost for them to be able to engage in lending activities.
Over time, he said, their cash flow concerns will be mitigated as the department expedites the process of providing lenders with their money in a period much shorter than the current lag of seven to 10 business days.
Meanwhile, Rep. Paul Kanjorski, D-Pa., who has introduced legislation to help ensure that FFEL lenders have access to liquidity, urged the administration on Friday to help student loan originators identify ways to get bridge loans.
"This initial liquidity will help to make the programs recently established by the Education Department to work even better," Kanjorski said. "It will also help to ensure that we maintain a vibrant student loan distribution system for years to come."