Following talks of purchasing FFEL loans and using a lender of last resort program to ensure student access to federal college funds, the Department of Education officially agreed on a temporary bail-out plan. For the next year, the Department has agreed to purchase loans federally subsidized student lenders have trouble selling at a profitable rate.
The credit crunch, caused in part by rising default rates and a decrease in federal student aid offered to student lenders, has caused about 80 lenders to leave the student market, reported the Los Angeles Times. Even the most important name in the market, student lender giant Sallie Mae, has threatened to pull out of the FFEL business. Attempting to ease fears that students loans would be difficult to secure, the Department of Education has been working with Congress on a regular basis to establish a quick and effective alternative.
The most recent announcement lays out an number of methods for ameliorating family and lender fears—at least temporarily. In a letter sent to Chief Executive Officers of student loan companies, Margaret Spellings promised that by July 1, 2009, the Department would purchase FFEL loans originated for the 2008-2009 school year. “Many lenders today do not have access to funds at a cost that justifies originating new loans. Our plan is designed to provide viability in the marketplace for lenders who step up and make loans in this difficult environment,” she stated.
To further assure that all students will have access to loans, the Department has agreed to put into play the Lender of Last Resort Program (LLR) which will be used to lend money to students who have trouble securing finances from weary lenders. Schools that choose to opt for the Direct Loan Program, a lesser used school loan program wherein students borrow directly from the government rather than from federally subsidized lenders, will also receive aid through a $15 billion boost in available funds. “This program should ensure that the market works for students needing loans this school year,” said Secretary Paulson of the Treasury.