Reprieve for student lenders moves to Senate

The House on Thursday moved to create a temporary safety net for student lenders currently squeezed by the credit crunch, as many fear education loans could dry up for the college-bound this fall.

But lobbyists for lenders and schools worry that the fix could get bogged down in the Senate, failing to help lenders in time to meet the surging demand for loans in the coming months.

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“If this goes through a long legislative process, the fact is it’s going to be too little, too late,” said Philip Day, the president of the National Association of Student Financial Aid Administrators (NASFAA).

Alarm is growing on Capitol Hill as lawmakers dread the prospect of students unable to get loans during an election year. Scores of student lenders have yanked back on loans — or fled the business altogether — since Congress and the Bush administration slashed subsidies on federally backed loans last year and tightened credit markets have increased capital costs.

House lawmakers on Thursday overwhelmingly approved legislation that would temporarily allow the Department of Education to buy federally backed loans from providers that are unable to raise capital. The bill would also bolster state agencies’ ability to step in as lenders of last resort in cases where private lenders are unable to satisfy the demand.

And it would increase the limits on unsubsidized Stafford loans so that students wouldn’t have to rely as much on costlier private loans.

Education lobbyists applauded the bill, but remained uncertain about whether it would be enough to ensure demand is met. The legislation is “an excellent step forward,” said Harris Miller, president of the Career College Association . “Is it a total solution? No.”

The senior vice president for government relations at the American Council on Education , Terry Hartle, said that the legislation “can only help” but warned that Congress, “to a certain extent, was shooting in the dark.”

The lender of last resort program is untested, and the state guaranty agencies are not in the business of making loans, lobbyists said. Also, it is not clear whether lenders strapped for capital will readily sell their loans to the Department of Education. Lobbyists for lenders said that it may not be profitable for them to do so, citing a provision of the bill that says the Education secretary can only buy the loans if they are at no extra cost to the government.

Lenders are pushing a different fix they say wouldn’t require congressional action: having the Federal Financing Bank (FFB), which is overseen by the Treasury, advance lenders funds backed by student loans. “It’s an immediate solution,” said Kevin Bruns, the executive director of America’s Student Loan Providers.

The idea got a boost this week when Senate Banking Committee Chairman Chris Dodd (D-Conn.) wrote a letter to Treasury Secretary Henry Paulson urging him to use the FFB to provide liquidity to the student loan market. He also wrote to Federal Reserve Chairman Ben Bernanke, asking him to use his authority to ensure access to loans.

The chairman of the House Financial Services Subcommittee on Capital Markets, Rep. Paul Kanjorksi (D-Pa.), wrote to Paulson and Education Secretary Margaret Spellings in February, asking them to consider several forms of federal financing, including advances from the FFB, to shore up capital to student lenders.

Kanjorski has also introduced a bill that would allow the 12 Federal Home Loan Banks to advance funds to student lenders. Sen. John Kerry (D-Mass.) has introduced companion legislation in the Senate.

The FFB proposal was discussed at a recent meeting between Paulson and Spellings, according to a student lender lobbyist. But the administration officials haven’t yet signaled whether they would go further than that.

A spokeswoman for the Treasury, Jennifer Zuccarelli, declined to comment on the proposal, saying only that the Treasury and the Department of Education “were following the issue closely to ensure that federal student aid, both grants and loans, remains available to all eligible students.”

The Department of Education did not respond to a request for comment by press time.

Lenders say that their situation is worsening. More than 40 have stopped lending under the Federal Family Education Loan (FFEL) Program, which provides government-backed loans to students, according to a tally compiled by NASFAA. Meanwhile, 12 have suspended private student loans altogether, including Bank of America , which said it would stop making such loans.

Student loan giant SLM Corp ., known as Sallie Mae, said on Thursday that it would record a loss in the first quarter. Meanwhile, JP Morgan Chase and Citigroup announced this week that they would stop making loans to some students and schools without giving details.

“We think that’s code for schools with large low-income and minority populations,” said Miller, who says the bulk of his members serve such students.

In a statement of administration policy issued Thursday, the Bush administration signaled support for the House legislation. Sen. Edward Kennedy (D-Mass.), chairman of the Senate Health, Education, Labor and Pensions (HELP) Committee, plans to mark up a very similar bill.

Kennedy this week called on schools to consider switching from the private FFEL lenders to the direct loan program, saying it “provides a stable and efficient way for all students — regardless of the institution they attend — to receive federally guaranteed student loans.”

In a letter to David Ward, the American Council on Education president, Kennedy wrote that he has urged Spellings to make it as easy as possible for institutions to switch to the direct loan program. On Thursday, Kennedy sent a letter to nearly 100 Massachusetts colleges and universities suggesting they register for the direct loan program, even if they don’t intend to offer it to students just yet.

But education lobbyists doubt that the direct loan program, which accounts for 20 percent of student loan volume, could scale up rapidly if private lenders fled the market. It was “simply not realistic” for the Department of Education to quickly ramp up to 50 percent of loan volume, Miller said.

Day, of NASFAA, noted that it was “not exactly easy” to switch to direct lending, in part because the schools most vulnerable to losing access to loans have the least resources to devote to the transition.