On May 21, 2008 the Department of Education issued a Dear Colleague Letter (DCL) (PDF, 831KB) that detailed the Administration’s short-term solution to address the student loan liquidity shortage and ensure that students, families, and schools continue to have access to federal loans to pay for college.
The Department’s plan appears to be a practical, workable and quite hopeful solution that will allow Sallie Mae to continue to offer federal student loans to all students at all schools without breaking stride, just as we have for more than 35 years. When we first raised concerns about liquidity and access to student loans, it was reassuring to see how quickly policymakers understood the severity of the situation and their willingness to work with the relevant stakeholders helped ensure the vitality and promise of the federal loan program. Sallie Mae’s commitment to student lending is steadfast and we will continue to bring all of our resources to deliver and protect federal student loan access to all students at all schools throughout the U.S.
Strong bipartisan support in Congress for a solution to protect students helped prompt a Department solution that provides funding at an acceptable rate at a time when the credit markets are experiencing unprecedented turbulence. The solution also comes at no cost to taxpayers — which will be confirmed by the federal Office of Management and Budget.
In the DCL, Secretary Spellings wrote, “Many lenders today do not have access to funds at a cost that justified new loans. Our plan is designed to provide viability in the marketplace for lenders who step up and make loans in this difficult environment.”
Specifically, the Department’s solution authorizes the following:
- FFELP loan sale to Department: Private lenders who make new federal loans for AY08-09 can until, Sept. 30, 2009, transfer ownership of loans first disbursed between May 1, 2008 and June 30, 2009 to the Department for full principal value of the loan including accrued interest, a lender-paid loan origination fee rebate and a $75 payment per loan for the costs of servicing.
- Department loan trusts: The Department will also invest in trusts containing federal student loans. In exchange for its investment, the Department will receive payouts from the trust equal to commercial paper interest rates, currently about 2.6 percent plus an additional 50 basis point margin, resulting in revenue for the government and creating capital for new loans.
Servicing of loans
While the Department’s plan is a workable solution for Sallie Mae, we believe that further detail and clarity is necessary. Specifically, the plan does not yet definitively detail where a loan that may be sold to the Department would be serviced. The Secretary has the authority by law to keep the servicing of loans with the original lender, but the current plan does not clarify this issue which would result in unnecessary disruption and confusion for the student and lead to higher defaults.
Sallie Mae feels strongly that split loan servicing does a disservice to students and schools. The data show that when the servicing of a student’s loans is split among multiple lenders, it is more difficult for the student to track their loans after they leave school, the added value that students receive from their guarantor’s default prevention activities is diluted and, ultimately, the student is more likely to default.
It is our strong recommendation that the proposal calls for the originating lender to continue to service a student’s loans.
Call to action
We urge representatives from schools and financial aid associations to share their similar concerns to the Department within the next week to ensure that their voices are heard before the final details of this solution are recorded in the Federal Register. We all agree that students deserve steady, constant, and predictable loan servicing. The Department needs to hear from you immediately so that any loan purchased retains its original FFELP servicer. School and financial aid officials can email the Department today at ffelinfo@ed.gov.
Commitment to FFELP
Sallie Mae was encouraged that the Department’s DCL commits to maintaining a strong, competitive FFELP. Secretary Spellings wrote, “We are also committed to designing programs that respect and support the current FFEL program as a successful public/private partnership, while protecting taxpayer interests.” Sallie Mae and its partners in the FFELP community will continue to work with Congress and the Administration to offer long-term FFELP solutions that work economically for all participants, minimize student and school disruption, and are fair to taxpayers.
In addition, while Department officials are confident that they will be able to double Direct Loan origination capacity without disruption, they believe this liquidity solution and yet to be finalized Lender of Last Resort plan will reduce the need for colleges and universities to switch to the Direct Loan Program. The Department is currently addressing its own hardware, software, and human resources constraints and noted that if current loan servicer, Affiliated Computer Services (ACS), is strained by increased volume and nears capacity, the Department will consider opening its servicing contract to a competitive bid process.
Sallie Mae appreciates Congress and the White House for approaching the liquidity and access issue with a sense of urgency and for giving the Department of Education the necessary authority to implement a workable plan to prevent college access problems for students and families.
As honest observers know, federal student lending capacity was shrinking rapidly and schools were beginning to have difficulty finding lenders who could provide loans. Clearly, the pace of action and bipartisan support demonstrates that all policy makers understood that continued college access without disruption, was of the utmost importance.
For Sallie Mae Vice Chairman and CEO Al Lord’s reaction to the Department’s liquidity solution please listen to our May 21 webcast.
Additional resources