On October 7, 2008, President Bush signed a one-year extension of the Ensuring Continued Access to Student Loans Act (ECASLA-Pub. L. No. 110-350). As lenders are currently committing loan volume to schools now for the coming academic year, the Department of Education is taking immediate action under the extended ECASLA authority to ensure students and families have uninterrupted access to Federal student loans for the 2009-2010 school year and beyond. U.S. Secretary of Education Margaret Spellings announced the following goals for implementing the extension of authority:
- Ensure availability of Federal student loans for the 2009-10 school year;
- Maintain the public/private partnership in the Federal student loan program;
- Protect taxpayer interests by adding no net costs to the Federal Government; and
- Provide the liquidity and support needed to stabilize the student loan marketplace.
Building on Experience and Success
In May 2008, Secretary Spellings and U.S. Secretary of the Treasury Henry Paulson announced a four-part plan with the authority provided under ECASLA to improve the functioning of the student loan marketplace and provide liquidity and stability in the near term to ensure that all qualified students had access to Federally guaranteed loans for the 2008-2009 school year.
The programs have been tremendously successful in addressing the challenges of the current school year. Loan originations for the 2008-09 academic year are exceeding last year's pace. In the Federal Family Education Loan Program (FFELP), there have been $41.8 billion in originations to date compared to $39 billion at this time last year. In the Federal Direct Loan (DL) program, there have been $17.9 billion in loans originated as compared to $12 billion at this time last year.
Lenders are heavily utilizing the Department of Education's new participation interest and loan purchase programs. Nineteen lenders have been approved for the Purchase of Participation Interests program (PPI), in which the Department purchases a 100 percent interest in pools of loans held by a custodian, providing near-term liquidity to student lenders. Twelve of those lenders have made use of the program and have, to date, received $8.7 billion in Department payments, which represents nearly 50 percent of current disbursements. Under the separate loan purchase program, nearly 800 lenders have signed documents indicating that they want the right, but not the obligation, to sell loans originated for the 2008-09 school year. To date, two lenders have sold $62 million in loans to the Department. It is anticipated that four lenders will sell loans to the Department in November 2008 for a total of approximately $350 million and that the number of loans sold will grow dramatically after January 2009 when lenders make their final disbursements on many student loans.
Taking Action Now to Ensure Future Loan Access
With the current economic and liquidity uncertainty, some lenders are dropping out of the student loan market altogether. With more than $65 billion in 2008-09 loans and approximately $130 billion in eligible 2003-07 student loans on bank balance sheets and auction rate securitizations, the capital markets are currently unable to generate adequate funds at prices that will ensure 2009-10 loans can be made.
As the current programs serve to reimburse lenders for making loans to students, they must obtain initial financing from private sources. However the continued tightening of the credit markets has created conditions making it difficult for lenders to secure the needed private capital. These factors have generated concern among lenders, schools, and students about the availability of funds for second disbursements in the 2008-09 academic year, as well as the availability of federally guaranteed loans for the 2009-10 academic year.
The Administration is committed to ensuring continued and timely access to Federal student loans for all eligible student and parent borrowers, which is why the Department of Education is taking additional action to immediately implement the extended ECASLA.
The Department of Education will replicate the PPI and loan purchase programs for academic year 2009-10 loans. The 2008-09 PPI and loan purchase programs will conclude as designed, and new programs will be launched to facilitate origination of 2009-2010 student loans. Terms and conditions of the 2009-2010 programs are anticipated to be largely consistent with the prior year's programs, though the Administration may need to refine the pricing and terms of these programs to ensure that these replicated programs result in no net cost to the federal government. For the loan purchase program, lenders will have the option to finalize the sale of a loan or loans to the Department as late as September 30, 2010. Thus a lender that completes the disbursement of a loan for the 2009-10 academic year can hold and service that loan until September 30, 2010. For the PPI, the Department will purchase participation interests in pools of loans made by lenders for the 2009-10 academic year. The Department will hold these participation interests up to September 30, 2010. All loans are originated and serviced as FFELP loans. Upon expiration, a trust may refinance the loans in the private financial market and pay off the Department's participation interest or sell the loans to the Department as described above.
The Administration intends to provide liquidity support to one or more conforming Asset-Backed Commercial Paper (ABCP) conduits. These conduits will purchase FFELP loans, providing longer-term stability to the guaranteed student loan marketplace. The Department intends to make all fully disbursed, non-consolidation FFELP loans awarded between October 1, 2003 and July 1, 2009 eligible for this program. An eligible lender trustee creates a pool called a conduit, to which other lenders transfer ownership of their student loans. This conduit issues commercial paper to sell, backed by the loans in the pool (Asset-Backed Commercial Paper). After private investors purchase the commercial paper (CP), student lenders would be paid out of the amounts received from these investors. The Department of Education will provide liquidity to the facility by entering into forward purchase commitments with these eligible lender trustees, whereby the Department promises to purchase, at a date in the future, eligible student loans at a prearranged price if the commercial paper that has been issued by the conduit cannot be re-issued or "rolled" at maturity and the conduit does not have sufficient cash to repay commercial paper investors.
Further, these programs will be cost neutral and in the best interest of the taxpayer, as required by law. To assure cost neutrality, different parameters may be placed on the terms for these programs. The Federal Register notice will include the final prices, terms, and conditions, as well as the Department's methodology for determining cost neutrality.
The Department has also taken the steps necessary to ensure the Lender-of-Last-Resort program is ready should it be needed. In addition, in recent months, the Department has expanded the capacity of the Direct Loan program.