With urban, low-income students most likely to face the fallout from the student loan credit crunch, House lawmakers say the Department of Education should prepare a contingency ‘lender of last resort’ program to assure continued access to loan capital.
“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,” said Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee, at a committee hearing Friday. “It isn’t enough for the department to simply monitor this situation.”
Under the government’s lender-of-last resort program, the U.S. education secretary could designate 35 guaranty agencies to provide loan capital in an emergency.
“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,” he said.
Secretary of Education Margaret Spellings told Miller the department is tracking daily loan volume in both the Federal Family Education Loan program — which relies on banks — and the federal Direct Loan program, comparing new data with past years. The department has sent letters to college presidents and financial aid officers on the loan situation and provided a new brochure on financial aid.
The Direct Loan program also can step in to cover additional borrowing. “We will be fully prepared to meet any situation,” she said.
But several organizations presenting testimony to the committee said they feared that low-income students would bear the brunt of any uncertainty in the loan market.
“We are hearing reports that some loan providers are shying away from schools with students who need low-cost loans the most,” said Dr. Philip Day, president of the National Association of Student Financial Aid Administrators.
The Students most at risk, he added, are those “from our community colleges, proprietary schools and other urban-based public and private institutions. Special measures may be necessary to assist these nonprofit, state-based organizations to ensure their continued presence in the federal student loan market.”
Fallout from the subprime mortgage meltdown is affecting many areas of the loan industry, including educational loans, said Chuck Sanders, chief executive officer of South Carolina Student Loan Corp. He said his agency has had 28 unsuccessful student loan auctions over the last few weeks, meaning it is not accessing available capital at favorable rates.
“Many lenders are seeing a negative return on funds, and they do not have other sources of capital to draw upon,” he said. “This means that they can only continue under current market conditions for a circumscribed period of time.”
For lawmakers such as Rep. Bobby Scott, D-Va., a Congressional Black Caucus member, the loan crisis is another sign that the federal government must provide more need-based grant aid. “We’re leaning much more heavily on loans than we previously had,” he said. “We have to make sure that Pell Grants and work/study cover more of the costs.”
Lawmakers also urged action before the peak lending season in August just prior to the new school year. “No one is looking forward to the scenario of hundreds of parents calling our offices because of difficulties with student loans,” said Rep. Jason Altmire, D-Pa.
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