Remember the (Student) Loan Crisis?
The economic question of the day – to bailout or not to bailout – extends beyond storied investment banks and outsized government-sponsored enterprises. As credit becomes ever more difficult to obtain, there is concern about lenders’ ability to continue to provide student loans.
Two provisions of the Ensuring Continued Access to Student Loans Act or ECASLA (not ERISA!), passed in April, are designed to forestall a worst-case scenario in which credit becomes so squeezed that lenders stop offering student loans en masse. Both provisions were set to expire in July of 2009, but, in a sign that credit markets are not expected to improve anytime soon, the House and Senate have voted to extend the emergency provisions to July of 2010. The extension awaits the President’s signature.
The first provision eases restrictions on the lender-of-last-resort program that serves as a backstop for students unable to obtain loans from normal lenders.
The second provision permits the Secretary of Education to purchase entire loans or “participating interests” in loans from lenders in the Federal Family Education Loan Program (FFELP) if the Secretary determines that lenders are unable to meet the demand for student loans. The federal government guarantees and subsidizes lenders to issue loans to students via FFELP, while the feds provide loans directly (i.e. without a private lender intermediary) to students through the Direct Loan program. This authority would essentially provide lenders additional capital that they would be obligated by the law to use to originate more student loans.
While lenders have certainly dropped out of the student loan business, there have been no clear-cut (or at least widespread) reports of students and parents having increased difficulty finding lenders, in part because schools are relying more on the Direct Loan program and in part because federally backed loan limits were raised earlier this year (in ECASLA). There was, admittedly, a bit of panic earlier this week when Wachovia limited the amount of funds universities could withdraw from an investment pool that nearly 1,000 schools use to cover operating costs.
Still, the Department of Education has already quietly used its enhanced authority, buying up interests (and perhaps entire loans, according to at least one report) in between $3 billion and $4 billion in loans. And the program is by no means free from criticism. The New America Foundation questions why the extension was needed now, a full year prior to the program’s expiration. Others believe the fees paid by the government to lenders are too high. Still others are concerned about higher interest rates for students:
Barmak Nassirian, the associate executive director at the American Association of Collegiate Registrars and Admissions Officers, said he found the [participating interest] program "disturbing," because it lets lenders borrow from the [Department of Education] and lend the money back to students at much higher rates.
Contraction of the market for student loans is certainly undesirable. But one has to wonder why the Department of Education has been more willing to prop up private lenders than to encourage participation in the Direct Loan program administered entirely by the federal government.