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Congressional Leaders Urge Federal Reserve to Intervene in ‘Student Loan Crisis’

As three more large student-loan providers pull out of the government-subsidized loan program, the National Association of Student Financial Aid Administrators is urging the Department of Education to institute three critical “safety nets” to ensure “all federal loans remain accessible to all eligible students.”

A letter from Dr. Philip Day, NASFAA president, this week to U.S. Education Secretary Margaret Spellings comes on the heels of a request by 31 members of Congress for the Federal Reserve to intervene in what analysts are calling a student loans crisis.

The increasing volatility of financial markets could disrupt access for an estimated 6.7 million students expected to apply for Federal Family Education Loan programs in the fall. Already, the Pennsylvania Higher Education Assistance Agency, which aids 500,000 students, shelved its Federal Family Education Loan program.

House members from both parties petitioned the Federal Reserve to intervene and steady the precarious student loan market. The request came Monday, a day after the central bank pledged a $30 billion line of credit to back up the assets of Bear Stearns & Co., the investment firm that was acquired by JP Morgan Chase & Co. Neither the Federal Reserve nor the Treasury Department has yet responded to the student loan intervention request.

Rep. Paul Kanjorski, D-Pa., chairman of the House Financial Services Committee’s capital markets, insurance and government sponsored enterprises subcommittee, and 30 other representatives released a letter urging Federal Reserve Chairman

Ben Bernanke to restore stability in the student loan marketplace to ensure continued access to student loans.

“In our letter, we asked the Federal Reserve to use its emergency authority to provide access to the Federal Reserve for student loan originators issuing highly rated securities backed by student loans,” Kanjorski said. “We also asked the Federal Reserve to allow originators to use student loans asset-backed securities as collateral at the security lending facility announce last week.”

Taking another approach, Day petitioned Spellings to:

·         Modify the Lender of Last Resort (LLR) program to allow institutions to demonstrate that there is a loan access problem, so that borrowers won’t bear this additional burden.

·         Ensure that schools that wish to transition to the Direct Loan program will be able to do so with as little administrative and financial burden as possible. And provide an infusion of liquidity to the student loan market so that non-bank lenders will be able to provide student loans this fall.

Speculation over whether or not federal loans will be available during this upcoming school year reached a fever pitch, as pundits alleged the eventual evaporation of federal loans during the current credit crunch. Certainly, more than a dozen lending companies that offered federal loans such as College Loan Corp., the eighth-largest originator of federally guaranteed loans, and Nelnet Inc., one of the nation’s largest loan consolidators, have recently backed out.

Reports that HSBC Bank USA, the M&T Bank Corp. and the TCF Financial Corp. all decided to stop offering federally guaranteed student loans surfaced yesterday. All three are among the program’s 50 largest lenders, together providing more than $560 million of the $119 billion in federally backed loans issued in the 2006 federal fiscal year, the Wall Street Journal reported.

Northeastern University became the second major institution behind The Pennsylvania State University to offer its students only federal Direct Loans.

Despite growing concerns, Spellings insists that a shortage is unlikely. “Federal student aid will continue to be available,” said Spellings, during a congressional hearing last week.

The vast majority of student borrowers, nationally, use student loans such as Perkins, Stafford and PLUS that are back by the federal government. Federal student loans are not dependent on borrowers’ credit scores, and federal laws specify the repayment terms and conditions.

Federal loans, however, come with restrictions. The most a first-year student can borrow is $3,500. For sophomores, the cutoff is $4,500. Juniors and senior are allowed $5,500. Independent students or dependent students whose parents have been denied a PLUS loan are eligible to receive additional aid.

To cover additional costs, students usually opt for costlier private loans from banks and private lenders. But to the dismay of many, private lenders are expected to be more selective during the upcoming academic year.

Financial aid representatives speculate that during these difficult economic times where lenders are reluctant to lend, students will have to have better credit scores and be enrolled at institutions that are more reputable and have higher graduation rates, financial aid professionals say.

Day said, “Access to private loans could be a problem in certain sectors of higher education, such as proprietary schools, community colleges and urban-based colleges and universities, all of whom serve a disproportionately large number of high-risk, economically disadvantaged students.”

Black and Hispanic students tend to rely to a greater degree on both federal and private loans than their White counterparts. Nearly 80 percent of students attending historically Black colleges and universities need some type of financial assistance. Fifty-five percent of African Americans and 58 percent of Hispanic student borrowers graduated with an unmanageable debt burden, meaning their monthly payments are 8 percent more than their monthly incomes, according to data collected by U.S. PIRG, a group of state Public Interest Research Groups.

“We don’t know for certain that lending institutions are not going to be offering loans to [high-risk students]. What we do know is that there is increased volatility in the marketplace. We know that these financial institution are having some challenges accessing funds,” Day said.

Help from the Federal Reserve would essentially safeguard redlining. “If what ends up emerging is the student loan equivalent of redlining, you’re going to find legislative leaders stepping into the fray,” Day said.

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