Federal Family Education Loan Lending Under Pressure

As the credit crunch continues, the student loan lending market has suffered. Witness Waco, Texas-based Brazos Higher Education Service Corp., becoming the latest student lender to stop making new loans to students through the Federal Family Education Loans (FFEL) program for the 2008-2009 academic year.

Brazos joined a list of 26 other private lenders that have stopped originating federal loans according to a recent statement by FinAid.org, a publication focused on financial aid.

Though the credit crunch has perpetuated the problem of lenders exiting the market – as investors shy away from securities backed by student loans reducing the availability of capital for lenders – the September 2007 passage of the College Cost Reduction and Access Act of 2007 (CCRA) and its focus on subsidy cuts further decreased the profitability of federal loans for these lenders.

The cuts included the elimination of an “Exceptional Performer” status that allowed lenders to receive higher insurance rates on defaulted loans, and reduced the insurance paid by the federal government to lenders on defaulted loans from 98 percent down to 95 percent by October 1, 2012.

The CCRA also increased the loan fees paid to the Department of Education by student loan lenders from 0.5 percent to 1 percent of the principal amount of the originated loan. These fees cannot be passed on to borrowers.

Though premature, it is possible an academic funding gap could arise, as such large lenders as College Loan Corp. and the Pennsylvania Higher Education Assistance Agency announce they would stop originating FFEL loans for the upcoming term.

Private student loans would likely be an easy finance option for many facing any such gap. With fees and interest rates at times double those of their federally-backed counterparts, private student loans inevitably carry a higher risk of default. As this market continues to grow so too will the growth of the private student loan collection market.