Student loan liquidity legislation signed into law
On May 1, 2008, Congress took a positive step toward preventing an access crisis for students seeking higher education by passing H.R. 5715, The Ensuring Continued Access to Student Loans Act of 2008.
The legislation, passed with broad bipartisan support and signed into law by the President on May 7, 2008, provides the Department of Education — at no cost to taxpayers — the authority to implement a comprehensive solution to the credit crunch in the student loan capital markets, primarily by giving the Secretary of Education the authority to purchase student loans from Federal Family Education Loan Program (FFELP) lenders. The legislation also includes several beneficial provisions for students and families including permanently increasing annual unsubsidized loan limits for all undergraduates and increasing flexibility for PLUS Loan borrowers.
Specifically, the legislation includes the following provisions:
- Increases Stafford Loan Limits: For loans disbursed on or after July 1, 2008, the bill does the following:
- Increases unsubsidized Stafford annual limits for dependent students by $2,000
- Increases unsubsidized Stafford aggregate limits for dependent students by $8,000 to $31,000 less any subsidized Stafford loans received
- Increases additional unsubsidized Stafford annual limits for independent students and dependent students whose parents are ineligible to borrow PLUS by $2,000
- Increases unsubsidized Stafford aggregate limits for independent students by $11,500 to $57,500 less any subsidized Stafford loans received
- No change to graduate and professional student loan limits
- Creates Grace Period for PLUS Loans: For PLUS Loans, creates a 6 month grace period after the date the student ceases to be enrolled at least half time. Accrued interest can be paid monthly, quarterly, or capitalized quarterly.
- Eases PLUS Credit Requirement: For PLUS loans made between July 1, 2008 and before July 1, 2009, the Department of Education is given flexibility to waive credit requirements if a borrower is 180 or fewer days delinquent on their home mortgage payments or medical bills and 89 days or fewer delinquent on repayment of any other debt.
- Authorizes Federal Student Loan Purchase by Department: Gives the Secretary the authority and flexibility to provide liquidity by purchasing FFELP Stafford and PLUS loans made on or after Oct. 1, 2003 from lenders provided that it would carry no cost to the federal government. The bill requires that the Secretary assure that the proceeds from the sale be used by lenders to stay in the FFELP program. The Secretary’s authority expires on July 1, 2009.
- Outlines Servicing of Purchased Loans: Authorizes the Secretary of Education, if agreed upon by eligible lenders selling loans, to contract with the lender for servicing of the loans provided that 1) the cost of the servicing arrangement does not exceed the cost the Federal Government would otherwise incur for the servicing of loans purchased and 2) that such servicing arrangement is in the best interest of the borrowers.
- Clarifies Lender of Last Resort: Clarifies existing law giving the Department of Education authority to advance federal funds to guaranty agencies in the event that they cannot access sufficient capital to originate new loans under Lender of Last Resort. Effective the date the bill becomes law, guaranty agencies, at the request of a school and under guidance of the Department, would be allowed to carry out the functions of lender of last resort on a school-wide basis, as opposed to an individual student basis. The Secretary’s authority to designate entire institutions for the "lender of last resort" program, however, sunsets at the end of the 2008-2009 school year.
- Use of Existing Government Mechanisms: Urges the use of the government’s existing mechanisms, namely the Federal Financing Bank and Federal Home Loan Banks to ensure students and families have access to federal student loans for the upcoming academic year.
- Guaranty Agency Inducements: Bars guaranty agencies from using prohibited inducements to expand loan volume while operating under lender of last resort. Guaranty agencies will not be permitted to market or promote loans under lender of last resort.
- Directs Any Savings to ACG/SMART Grants: Directs all savings generated by the legislation into ACG and SMART grants for low-income students. Adds a fifth year to SMART Grant eligibility for programs that require five years and allows students attending at least half time and eligible non-citizens to qualify for ACG and SMART grants.
- Requires GAO study: Requiring the General Accountability Office to conduct a study of the impact of raising loan limits on (1) tuition, fees, and room and board at institutions of higher education; and (2) private loan borrowing for attendance at institutions of higher education.
As the largest originator and servicer of federal loans, Sallie Mae is taking every step possible to ensure student access, as has been our mission for our 35-year history. Sallie Mae supports the efforts of Congress and the Administration to ensure sufficient liquidity is available to meet the explosion in loan demand created by lenders leaving the program. We are optimistic the Secretary of Education will use the new authority granted by Congress to quickly implement a comprehensive solution that addresses the magnitude of the situation.
In related news, Rep. Paul Kanjorski (D-PA) Chairman of the House Financial Services Subcommittee on Capital Markets, introduced H.R. 5914, the Student Loan Access Act. If enacted, the bill would be another positive step to provide liquidity in the student loan marketplace by giving the Treasury Department explicit authority to the Federal Financing Bank (FFB) for funding of federal student loans. Senate Banking Committee Chairman Christopher Dodd (D-CT) and others recently sent a letter requesting that the Treasury Department use the Federal Financing Bank to provide liquidity, but the Administration said it did not have the authority to use this facility for student loans. Sen. Dodd is expected to lead any efforts in the Senate to enact legislation to grant the FFB this authority.
Federal Reserve Chairman Ben Bernanke also weighed in on recent developments in the student loan marketplace. In a letter to Senate Banking Committee Chairman Dodd, Bernanke wrote that recent student loan market problems stem from causes beyond the lack of liquidity, and suggested Congress may want to revisit the changes to the market rate of return for lenders made last year through the College Cost Reduction and Access Act. “In particular, Congress may well wish to revisit the question of whether setting a fixed spread over the commercial paper rate is the best approach. You may decide that a more market-sensitive-approach — flexible enough to provide a wider spread during times of market stress and a narrower one during normal times — could provide a more robust structure,” wrote Bernanke.
In addition, Chairman Bernanke and the Federal Reserve Board decided to allow "primary dealers," meaning investment banks, to use AAA-rated, government guaranteed student loans as collateral for borrowing under its Term Securities Lending Facility. Primarily a short-term source of funding for banks, Rep. Kanjorski and Sallie Mae believe this will benefit the FFELP securitization market and provide an indirect but positive impact on liquidity in the student loan marketplace.
Additional information