Lawmakers Urge Spellings to Take Action to Ensure Students Have Continued Access to Federal College Loans

Friday, March 14, 2008

WASHINGTON, DC -- At a hearing today on Capitol Hill, House lawmakers urged U.S. Secretary of Education Margaret Spellings to make sure that contingency plans are in place and fully operational to ensure that students and families continue to have uninterrupted access to federal college loans in the unlikely event that stress in the nation’s credit markets leads a significant number of lenders in the federally guaranteed student loan programs to substantially reduce their lending activity.

Lawmakers on the House Education and Labor Committee, which convened today’s hearing, were concerned by the Secretary’s testimony that she was monitoring the federal student loan system, but hadn’t taken decisive actions to fully prepare backup plans that would provide borrowers with continued, timely access to federal college loans.

“While no students or schools have experienced trouble accessing federal college loans to date, we also know that much of what has happened in the credit market has come as a surprise. It isn’t enough for the Department to simply monitor this situation. The fact is that there are tools already built into federal law that would provide students seamless access to all the federal college loans they are eligible to receive, and the Secretary has a responsibility to make sure that these plans have been road tested and are ready to go – if needed,” said U.S. Rep. George Miller (D-CA), the chairman of the committee. “Students and families working hard to pay for college deserve every assurance that the Department has plans in place that would safeguard access to all the federal college loans they are eligible to receive.”

The lawmakers called on the U.S. Department of Education to take immediate actions to update and thoroughly prepare to implement a lender-of-last-resort program, in which the Secretary would designate 35 guaranty agencies around the country as lenders of last resort. Under the Higher Education Act, these guaranty agencies are obligated to serve as lenders of last resort to avert any possible problem in access to student loans, thereby providing a nationwide network of backstop lenders. 

If guaranty agencies or other lender-of-last resort program participants had trouble accessing capital to finance lender-of-last resort-loans, the Secretary would then have the authority to advance federal capital directly from the U.S. Treasury to guaranty agencies to finance these loans. The Education Department had established a lender-of-last-resort plan in 1998, but never needed to implement the plan.

The lawmakers also urged Spellings to ensure that the Direct Student Loan program was fully equipped to handle any increased demand for federal loans. Because the Direct Loan program is not reliant on lenders, it is not affected by the credit market crunch.

The Department operates two federal student loan programs: the Federal Family Education Loan Program (FFELP) and the Direct Loan Program. Loans offered through the two programs carry the same interest rates, terms and conditions for borrowers, and are generally much cheaper than private college loans. Under FFELP, the federal government guarantees and subsidizes the loans that lenders issue to students and parents. Under the Direct Student Loan program, the federal government offers the loans directly to students through their schools, securing loan capital from the U.S. Treasury.

For more information on how these programs operate, click here.

Chairman Miller and U.S. Senator Edward M. Kennedy, the chairman of the Senate Health, Education, Labor, Pensions Committee, first wrote to Secretary Spellings last month asking her to take steps to ensure these contingency plans would be fully operational. To see that letter, click here.

To see the testimony delivered by Secretary Spellings and the other witnesses at today’s hearing, click here.

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FOR IMMEDIATE RELEASE
Contact: Tom Kiley / Rachel Racusen
2181 Rayburn House Office Building
Washington, DC 20515
202-226-0853