Due to limited access to funding in the capital markets and legislative cuts, numerous lenders have ceased or suspended making federal or private student loans. With various legislation proposals pending in both the House and Senate, Senate Banking Committee Chairman Chris Dodd (D-CT) held a hearing on April 15, 2008 to examine the impact of turmoil in the credit markets on the availability of student loans. At the hearing, Senator Dodd urged preventive action be taken to ensure that students and their families continue to have access to student loans, saying that the various legislation solutions would not address the problems in time.
Sallie Mae Vice Chairman and Chief Financial Officer Jack Remondi testified before the committee along with representatives from higher education and financial services community including:
During the hearing, Chairman Dodd and the other witnesses agreed that action was needed immediately and they endorsed a proposal to have the Department of Treasury’s Federal Financing Bank (FFB) provide funding to student loan providers. Below are some of the highlights from the hearing testimony:
Jack Remondi
"This year, we will see the largest high school graduation class in history enroll in college. Higher education enrollments typically increase in periods of economic downturns. Home equity borrowing, sometimes used to pay for education, is in decline. Due to these factors, demand for federal and non-federal loans is on the rise... Yet both federal and non-federal student loan markets are under severe stress. For the current academic season, we are facing a scenario where the demand for student loans will significantly outstrip the supply.
"It is our view that the gap between supply and demand is beginning to show. Although it's early, new loan applications to Sallie Mae are up 26 percent this month over last year, a pace that we have made clear, due to the access issues, that we cannot fund.
"In our opinion, the least disruptive, most cost effective, most controllable and quickest proposal to implement would be for the Department of Treasury’s Federal Financing Bank, to provide liquidity for federally guaranteed loans.
"With front page articles beginning to appear in the nation’s newspapers detailing students’ inability toget new loans, this plan would help restore consumer confidence as parents and students would know that federal program specifically designed to provide them access to low cost loans will be there when they need it."
"We do not have months, or even weeks to decide the best course of action. The Administration can move immediately to make available advances from the Federal Financing Bank, and that would have the least disruptive, most immediate and beneficial impact on the situation. We hope Congress can urge them to do so without delay."
Chairman Dodd
"While I am unaware of an instance to date when a student has been unable to secure a loan, the withdrawal of these lenders, the ongoing turmoil in U.S. credit markets and the illiquidity in the student loan market have fueled concerns that a potential student loan credit crunch may be looming — one which could leave millions of students in a last-minute dash to secure the financial assistance they need to attend college this academic year."
"Last month, the Treasury and the Fed demonstrated their willingness and ability to take strong action to preserve liquidity and order in the capital markets. Their actions were unprecedented. But so are the times in which we find ourselves. It would be a mistake, in my view, for anyone to think that the crisis has passed. If the Fed and Treasury can commit $30 billion of taxpayer dollars to enable the takeover of Bear Stearns by JP Morgan Chase, then surely they can step in to enable working families to achieve their dream of a college education for their kids."
"And I stand personally ready to do whatever I, or this Committee, can to prevent a liquidity crisis from engulfing the student loan market."
"To that end, I will be sending a letter [link to letter] to Secretary Paulson asking him to consider using the Federal Financing Bank to help prime the pump of liquidity in order to help avert a funding crisis in the student loan market. I will also be writing [link to letter] to Fed Chairman Bernanke, asking him to use all existing tools to avert a breakdown in the market for student loans, including allowing federally-backed and AAA-rated private student loans to be used as collateral at the Fed’s temporary secured lending facility (TSLF). I invite my colleagues to join me in this effort."
Sarah Flanagan
"Please encourage Education Secretary Spellings and Treasury Secretary Paulson to make a joint statement to the American people that they will stand by America's students and the loan programs. That type of assurance in and of itself could send an important signal to investors that this is safe paper and ones they should invest in."
"Ultimately, this is not about the lenders. This is about the students. Let's give them a simple assurance that their educations matter to us all."
Patricia McGuire
"The federally guaranteed loan program is essential to ensure that Trinity students, and students like them, can stay in school, focus on their academics, and earn their degrees. At a time when there’s so much national rhetoric about the cost of higher education and the squeeze on low income students, in particular, the credit crisis and the threats to the loan programs could be catastrophic not only for individual students but for the future economic productivity of our nation."
"Any interruption of student loans will be a great loss not only for our students and our institutions but for the nation they will continue to lead in the future."
Mark Kantrowitz
"These are signs of a very serious threat to our nation’s education financing system and cause for concern. Without loans, some students may be forced to drop out of college."
"Existing solutions are inadequate. Neither the Direct Loan program nor the lender-of-last-resort program has been tested under the extreme conditions we face today. For example, Federal Direct Consolidation Loan volume will be more than four times last year's volume and more than twice the peak volume. Neither program addresses the liquidity problems that are forcing education lenders to exit the marketplace. Both are reactive solutions that offer the potential for significant disruption during any transition period."
"It is better to implement proactive solutions that prevent a crisis. The most effective solutions will involve injecting liquidity into the student loan system."
Tom Deutsch
"Ultimately, if no relief is found, the total supply of loans available through all the various programs will likely not meet student demand efficiently and effectively this fall."
"Given the urgent need for liquidity for student loan originators, the most comprehensive and elegant short-term solution to this developing crisis would be for the Federal Financing Bank (FFB) to provide additional liquidity to lenders to originate new FFELP loans as well as to the asset-backed market indirectly."
"We believe the FFB currently has the statutory authority to purchase participation interests in pools of newly originated government guaranteed FFELP loans as well as senior, triple-A rated securities backed by FFELP loans."
Due to support from Committee members for Chairman Dodd’s call for the Treasury Department and the Federal Reserve to provide immediate liquidity to student loan providers, the Chairman delayed sending his letters for two days in order to collect additional signatures from Senators on the banking panel.
In related news, on Sallie Mae’s first quarter earnings conference call, Chief Executive Officer Al Lord reiterated that the federal student loan program needs to continue without any disruption to ensure that student and families get the loans they need for college:
"The Company [Sallie Mae] is working with members of both parties, and in both houses of Congress to make solutions for lending viable… We feel a special obligation to make sure that this program operates without a serious hiccup… The most important issue is kids getting loans without some major operational or financing snafu. I've been very, very pleased with the way that not only the various parts of government but the two parties have worked together on this."
Solutions to protect college access
Federal Financing Bank: The least disruptive, most cost-effective, most manageable, and quickest proposal to implement would be for the Department of Treasury’s Federal Financing Bank, or FFB, to provide liquidity for federally guaranteed loans. The FFB is already authorized by statute to purchase and sell any obligation which is issued, sold or guaranteed by a Federal agency. Therefore, legislative action is unnecessary to make this happen. Upon deciding to exercise this authority and make funding available for new loans, the Administration can do this in time to help.
Under this proposal, the FFB would purchase, for the "life of the loan," participation interests in pools of newly originated guaranteed loans from eligible FFELP lenders. Borrowing costs would be set at a rate low enough for lenders to have an incentive to access this credit in today’s inhospitable environment, but high enough that lenders will be eager to return to the markets when conditions improve.
To ensure the least amount of disruption to the borrower and to relieve the FFB of any responsibility to service the loans, lenders would continue to manage and service the loans under the same strict requirements that govern all FFELP loans. Servicing and guaranty agency agreements would remain with the lender. Consequently, day-to-day administration of the loans would be the responsibility of the eligible lender, not the Federal Financing Bank.
Federal Reserve: The Federal Reserve should allow primary dealers and issuers to use student loan ABS as collateral to borrow from the Federal Reserve’s newly created Term Security Lending Facility. This step would all be helpful in creating additional liquidity to ensure the federal student loan program continues to function without interruption during this credit crisis. Second, the Federal Reserve has emergency authority under Section 13 of the Federal Reserve Act (12 USC 343) to provide immediate assistance to non-bank lenders that could provide immediate liquidity to the student loan market.
Federal Home Loan Banks: The Emergency Student Loan Market Liquidity Act, H.R. 5723 and S. 2847, would support the student loan financing markets by authorizing the Federal Home Loan Bank (FHLB) system to take federal student loans as collateral for advances, which in turn would be used by lenders to make new loans. The legislation would also authorize Federal Home Loan Banks to invest their surplus funds in student loan asset backed securities.
Call to action
Colleges and universities concerned about the uncertainty that surrounds the federal student loan program, as lenders drop out of the program or become selective with the types of institutions or students they will serve, should make their voices heard on Capitol Hill.
Since time is of paramount concern, the best course of action is to email the Department of Education and call each of your two Senators and your Representative in Congress by dialing the U.S. Capitol switchboard at (202) 224-3121.