Reauthorization of the Higher Education Act
Ensuring Student Access to Affordable Education Loans
Under current law, the interest rate on student loans is scheduled to be reduced on July 1st, 1998, saving the typical undergraduate student borrower hundreds of dollars and graduate student borrowers thousands of dollars. However, some lenders have raised questions about whether they would continue to make government-guaranteed student loans at the new, lower interest rate.
A recent Treasury Department analysis found that Congress could address the lenders' concerns "at little or no net cost to students." Thus, the Clinton Administration has proposed a reasonable solution that would enable the scheduled interest rate reduction to go into effect while changing the interest rate instrument and making other improvements in the program to provide lenders with a profit sufficient to continue to participate in the program.
There is ample time for Congress to enact the proposed changes. However, should it be necessary, the Department is prepared to -- and it is only prudent to -- use the tools Congress has provided to ensure all students have continued access to loans. Each year, lenders leave the government-guaranteed program without adverse consequences to students because other lenders are eager to make the additional loans; since the mid-1980s the number of lenders has declined from over 11,000 to under 5,000 today. Should an unusual number of lenders decline to continue to make government-guaranteed student loans, current law and practice provide three potential methods of ensuring access to student loans:
- Sallie Mae. Under the Higher Education Act (HEA), Sallie Mae is designated as the "lender of last resort." At the Secretary of Education's request, Sallie Mae is required to serve any eligible students who cannot get loans from other sources. Sallie Mae currently provides last-resort loans to students in Texas and Puerto Rico.
- Guaranty Agencies. Guaranty agencies are also required to serve as lenders of last resort under the HEA. The Secretary has authority to advance federal capital to guaranty agencies to be used for funding last-resort loans. Guaranty agencies currently provide last-resort loans as needed.
- The Direct Loan program. The Direct Loan program can help meet any remaining need for student loans in the short- and long-terms. The Department is now preparing contingency plans so that the Direct Loan program could meet any remaining need for student loans should it be necessary. This is only prudent planning; the Department is committed to sustaining access to both the Direct Loan program and the federally-guaranteed loan program.
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