U.S. Secretary of Education Margaret Spellings announced today that the Department would take further action to purchase Federal Family Education Loan Program (FFELP) loans to ensure students have continued access to Federal student loans. Secretary Spellings stressed that this action, like the Department’s current activities, is consistent with the following goals:
- Ensure availability of Federal student loans;
- 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.
As part of the Ensuring Continued Access to Student Loans Act (ECASLA, Public Law 110-350) implementation, the Department of Education announced November 8, 2008, that it would provide liquidity support to one or more conforming Asset-Based Commercial Paper (ABCP) conduits. The conduits will purchase FFELP loans, providing longer term stability to the marketplace. The Department, in turn, will serve as a potential buyer of last resort or backstop to the conduit. In that announcement, the Department indicated that additional action may be necessary to ensure that students and families have access to FFELP loans.
In this regard, Secretary Spellings announced the Department of Education is taking the additional step of using existing authority to purchase certain 2007-2008 academic year FFELP loans. This is a short-term program designed to be a temporary mechanism to minimize disruption in student lending prior to the Asset Backed Commercial Paper conduit(s) becoming operational, or until February 28, 2009, whichever occurs first. The Department will purchase up to $500 million in loans each week, up to an aggregate of $6.5 billion during the time-period. While we believe the price and the types of eligible loans will not change, some other terms may need to be adjusted to ensure cost neutrality.
Ensuring Fair and Equitable Purchases
The Department anticipates purchasing up to $500 million in eligible loans each week, beginning in early December. The Department will specify a day and time-period for lenders to offer loans for purchase, and the Department will then sum the total of the offers. If the total of the original offers is equal to or less than the weekly $500 million purchase amount, the Department will purchase the loans as offered by each lender. If the loans offered for sale by lenders exceed $500 million, the Department will determine the amount that each lender will be eligible to receive from the weekly total, not to exceed the amount offered for sale by that particular lender. This will be done by an allocation mechanism that will be outlined in a Federal Register notice. This process is intended to ensure a fair and equitable distribution of purchases based on actual FFELP activity by each lender.
The Department will buy fully disbursed FFELP Subsidized Stafford, Unsubsidized Stafford, and PLUS loans originated for academic year 2007-2008. The loans must have been first disbursed after May 1, 2007, for the loan period beginning on or including July 1, 2007, and must have been made to pay the costs of attendance at a postsecondary institution during the 2007-2008 academic year. FFELP consolidation loans are not eligible to be purchased by the Department under ECASLA. Loans may not be 210 or more days delinquent. Finally, at the time of purchase by the Department, a loan must be free and clear of any encumbrance, lien or security interest or any other prior commitment.
Included in this program are loans with certain borrower benefits; however, the benefits will be limited to those that can be implemented by Federal Student Aid’s current servicing processes. A complete description of supported benefits will be included in the forthcoming Federal Register notice announcing this program. Consistent with the law’s provision that there be no net cost to the taxpayer. The Department will not purchase loans if a cash rebate, item or product was promised to the borrower.
The Department will purchase loans at 97 percent of the principal and unpaid interest coincidental with the standard guaranty rate for these loans. Upon purchase, the loans become Federal assets and will be serviced by the Department’s servicer as a FFELP loan. As a condition of participation in this extension of the purchase program, a lender must continue to originate new loans and participate in the FFELP. Additional terms and conditions will be included in the above-referenced Federal Register announcement.