Fed Officials Insist Student Loan Program Remains Strong

Federal officials have yet to express alarm at the end of some student aid programs, as covered in yesterday’s Wall Street Journal and insideARM.com recently, ("Credit Crunch Hits State Education Loans; Michigan Suspends Program," Feb. 20), but they are carefully watching the situation, according to an aide to the U.S. House Education and Labor Committee.

In a hearing several weeks ago on the availability of federal student loans, Secretary of Education Margaret Spellings said that federal aid will continue to be available, and any “disruptions in the private lending market have so far not negatively affected students’ ability to access federal loans.”

According to the Education Department, student loans constitute an enterprise worth more than $400 billion involving multiple federal agencies, guarantee agencies, and secondary markets.

“Federal loans and other federal aid comprise one piece of this sector, about 26 percent in dollar terms. In student terms, more than 10 million of 18 million college students receive financial aid from my department,” Spellings testified. “A small number of these lenders have reduced their participation or stopped originating new loans. As you know, these actions are largely a result of broader stress across credit markets and the economy as a whole. Even in the limited cases where lenders have reduced participation in the FFEL (Federal Family Education Loan) program, other lenders have stepped in to meet student needs.”

The Journal reported that Brazos Higher Education Service Corp. on Monday suspended new loans through the FFEL. Brazos has about $15 billion in student loans.

The Congressional aide said that some 2,000 lenders participate in the FFEL program, so some may be cutting back or suspending their participation, but there are other lenders who can step in to pick up the slack. The top 50 lenders provide more than 80 percent of the loans.

The committee is watching carefully the developments in the education finance market, which in some ways mirror that of the mortgage market. The education lending programs that have experienced trouble so far are those primarily backed by sales of securities in the capital markets, according to the aide. And there is a dearth of buyers for these securities, similar to the environment for securities designed to back subprime mortgages.

There are several emergency programs to support student lending in the event of a crisis, the aide added. The recent hearing covered in part the readiness of these emergency programs.

Consumer finance analyst Dimitri Michaud has posted a blog on this topic today in the insideARM Blogs. Read it now and share your thoughts.