Colleges Keep Fingers Crossed That Student Loans Remain Available this Fall

Since last winter, colleges have been nervously awaiting August to see if students have access to the loan money they need to pay their fall tuition bills. So far, the ongoing scrambling by banks and colleges to find alternative sources of loan capital seems to have paid off, and no crisis has yet emerged.

On the private loan front, there are continuing signs that merit concern, however. For example, Wachovia recently announced that it would not make private student loans this fall, and at least two states have had to intervene to keep their state lending agencies solvent.

In federal loans, the Department of Education’s efforts in new liquidity programs have been arduous, and are still being tweaked. The Federal Family Education Loan Program (FFELP) changes were implemented under the emergency student loan legislation, H.R. 5715, approved by Congress in June (see WIR, 5/28/08).

On July 1, the department published a description in the Federal Register of how it would undertake its new role. After a number of delays, announcements, and a continuing series of webinars, they have finalized the forms and agreements spelling out the two distinct programs. By the July 31 deadline, a number of lenders had expressed interest in participating in the program and, reportedly, several have agreements with the department.

The first program pretty straightforwardly enables the Department of Education to purchase federal student loans from lenders who have sufficient capital to make loans. In short, the department acts as a secondary lender. Lenders have about a year to decide whether to sell the loans to the department, or to wait for a better opportunity in the marketplace. Loans disbursed from May 1, 2008, through next summer are eligible for purchase by the department.

The second liquidity program – the participation interest purchase – is more complex, time-consuming, and potentially costly for lenders who need capital. It’s also less clear how well this program will work, because lenders must borrow the funds and disburse loans before the department will buy an interest in them. For lenders that don't have access to capital in the first place, borrowing may be difficult (though we know of at least one state agency that has done it).

Under this second program, the department will only accept transactions of at least $50 million. Required documents for the participation interest may be submitted to the Department of Education beginning August 15. After approval by the department, the transaction must go through an intermediary or custodian, who will certify the loans and handle the transaction. This is a tight timetable for loans that have to get out the bank door and into students’ hands almost instantly.

To sum it up, while FFELP lenders of all types are still promising loans, it is not clear that all of those lenders will actually have capital this month. In a pinch, most private colleges can still find a lender for federal loans – or can switch to direct loans, as many colleges have done.

The real concern is for schools whose students rely heavily on supplemental private loans. Access to those loans (individual and/or home equity) is tight, and lenders are selective in whom they will lend to – or won’t, such as students without a high FICO score, those who can’t find a creditworthy co-signer, or in the case of home equity, those whose home values have fallen below their mortgage. Currently, proprietary school and community college students are having the most difficulty getting private loans. If problems intensify this fall, both lower- and middle-income students – and the colleges they attend – may be adversely affected.

For more information, please contact:
Maureen Budetti