CQ TODAY PRINT EDITION - EDUCATION
March 28, 2008 - 5:06 p.m.
Administration Sees No Need to Act as Lenders Leave Student Aid Program
By Libby George, CQ Staff

Senior administration officials said Friday that they do not intend to take action to prevent more lenders from dropping out of a federal student loan program.

Treasury Secretary Henry M. Paulson Jr. and Education Secretary Margaret Spellings, in response to a Feb. 15 inquiry by 21 House lawmakers, said they do not believe the ongoing credit crunch will hamper the ability of students to get loans, because the 2,000 providers still participating will be able to "quickly address instances where some  . . .  lenders choose to limit their participation."

Paulson and Spellings said the troubles "reflect general stress in the credit markets rather than specific concerns about the underlying student loan collateral."

Their response did not satisfy Rep. Paul E. Kanjorski, chairman of the Financial Services Subcommittee on Capital Markets, who spearheaded last month's query.

"I find it unfortunate that the administration is not taking greater action at this time to fix the problem," said Kanjorski, who had asked the Cabinet secretaries to consider working with the Federal Reserve and other government entities to inject more cash into the system. "How many more lenders must drop out of the Federal Family Education Loan Program before the administration will take action?"

The credit crisis shaking the economy has caused several bond auctions, which lenders use to finance loans to students, to fail. Coupled with last year's cuts in subsidies to lenders that make federally guaranteed student loans (PL 110-84), dozens of private lenders have decided to leave the program - most notably the Pennsylvania Higher Education Assistance Agency.

According to the Web site Finaid.org, 30 lenders have left the program entirely since the beginning of the year and seven more have partially suspended their participation. According to the site, in fiscal 2006, those lenders accounted for nearly 10 percent of federally backed loan origination - amounting to $4.1 billion.

Finaid.org publisher Mark Kantrowitz warned that without either government intervention or a thawing of capital markets, more lenders are certain to drop out.

"Every week, I see more and more lenders leaving the program," Kantrowitz said. He said many lenders are still using proceeds from last year's auctions. "There will be more lenders dropping out if there is no government intervention on the liquidity issue. ... When they run out of money, they can*t make new loans."

Direct Loans, Other Options

So far, the chairmen of the congressional committees with jurisdiction over education, Rep. George Miller, D-Calif., and Sen. Edward M.

Kennedy, D-Mass., have only demanded Spellings make sure the government*s direct lending program is prepared to handle an uptick in loan volume. Miller and Kennedy have also asked Spellings and Paulson to prepare the *lender of last resort* program, which would allow the Treasury to float capital to guarantee agencies to allow them to make loans in case of a crisis.

But pressure is mounting from other quarters for the government to shore up private lenders participating in the loan program. Earlier this week, the National Association of Student Financial Aid Administrators wrote House and Senate Education leaders advocating Kanjorski*s approach.

"Action should be taken now to provide liquidity to the loan providers impacted by the collapse of this market," NASFAA President Dr. Philip R. Day, Jr. wrote. "Doing so will not only provide the most seamless solution to assuring loan availability to students this fall, but will also minimize the risks inherent in" the direct loan and "lender of last resort" programs.

Still, Day also encouraged the government to make sure those programs are prepared to pick up the slack should more lenders leave the program.

On March 17, Kanjorski and 31 other lawmakers wrote Federal Reserve Chairman Ben S. Bernanke asking him to take action. Bernanke has not yet responded.

"We need proactive, swift action now to provide stability in the student loan marketplace. ... I will continue to push for action on this critical issue," Kanjorski said.

Source: CQ Today Print Edition

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