Kennedy and Miller Weigh In on Credit Crunch and Student Loans

Late yesterday, two key Congressional leaders urged U.S. Education Department Secretary Margaret Spellings to ready long-standing “fail safe” systems that guarantee every student access to a federal Stafford loan no matter what occurs in the private credit markets. Sen. Edward M. Kennedy (D-MA) and Rep. George M. Miller (D-CA), the Chairmen of the Congressional education committees, urged Spellings to ramp up the Federal Family Education Loan (FFEL) program’s “lender of last resort” plan and make known to colleges and universities their easy ability to enter the federal Direct Student Loan program.

[slideshow] On Wednesday, Education Under Secretary Sara Martinez Tucker indicated that Spellings would send college presidents nationwide a letter assuring them of the stability of the federal student loan programs. Martinez Tucker also told The Chronicle of Higher Education that implementing the lender of last resort system was “far, far, far” away from being a necessity. We at Higher Ed Watch hope Spellings takes much more aggressive action to assure families and students, not just college presidents, that the credit crunch presents zero danger to federal Stafford loan availability.

There are thousands of college loan providers nationwide. And through the ready implementation of the FFEL lender of last resort program and ready expansion of the Direct Loan program, the U.S. government guarantees that every student who needs a federal Stafford loan will be able to access one. In fact, guaranteed aggregate Stafford loan limits double to $46,000 per undergraduate in the event that adverse credit history inhibits assumption of an additional PLUS loan for undergraduate students.

Contrary to sensational media reports (linked is a particularly irresponsible report), no student should be allowed to think they can’t go to college, because they won’t be able to get a loan. This isn’t a time to bicker about the merits of the Federal Family Education Loan program versus the Direct Loan program. The Secretary has a ministerial duty to the country and responsibility to America’s families to act publicly and forcefully to reassure them of the professional execution of long standing government systems that guarantee the availability of federal student loans. Madame Secretary, time to get off the sidelines.

We’ve already privately recommended specific action steps for Spellings to take. If you have others, please comment.

The full text of the Kennedy and Miller letter appears below. [Disclosure: the Editor of Higher Ed Watch used to work for Senator Kennedy.]

February 28, 2008

The Honorable Margaret Spellings
Secretary of Education
U.S. Department of Education
400 Maryland Avenue, SW
Washington, DC 20202

Dear Secretary Spellings:

As you know, the U.S. capital market has been experiencing stress as a result of the sub-prime mortgage crisis and investor uncertainty about the condition of the economy. Recently, certain student loan lenders have encountered difficulties in accessing the capital market to finance their lending activity. While these disruptions have had an impact on some lenders, they so far have not negatively affected students’ ability to access federal loans. Some lenders have expressed concern about their ability to continue to make loans through the Federal Family Education Loan Program (FFELP), but others are anticipating increasing their student loan business in response to changes in the FFEL marketplace. As you know, there are several tools already in statute that protect against any unforeseen disruptions in the private capital markets. We urge you to take any steps necessary to ensure that these options are readily available so that recent activity in the credit markets does not adversely affect students’ ability to secure federal student loans in a timely manner.

Since the capital market disruptions began, we have been closely monitoring the situation and its potential impact on the Federal student loan programs. We and our staffs have held in-depth discussions, and will continue meeting with, the many stakeholders involved in delivering Federal college loans to students and families, including schools, lenders, guaranty agencies, secondary markets, investment bankers, and officials of various Federal agencies, including the Departments of Education and Treasury. Through these discussions we have gained a detailed understanding of how the current difficulties in the credit markets might affect some segments of the FFELP industry, especially those lenders that have relied on the auction rate securities market.

While we are hopeful that overall credit market conditions will soon improve, subsequently easing the constraints some in the FFELP industry currently face, it is only prudent to prepare now to ensure that these conditions do not negatively impact students’ ability to access federal student loans. As we have seen far too often, shocks in the credit and financial markets come as a surprise, leaving those affected little time to react.

Having plans in place and operational now will help ensure that all stakeholders, including institutions and the federal government, can respond to any potential loan access problems with the least possible delay for students, families, and schools. More importantly, such plans will provide students and families with the assurance that they will continue to be able to obtain Federal student loans to finance their education.

The Department of Education needs to be prepared to use the tools the Congress has provided to ensure that all eligible students continue to have uninterrupted and timely access to Federal student loans in the unlikely event that stress in the credit market leads a significant number of lenders to substantially reduce their activity in FFELP.

First, the Department of Education should update plans to implement a lender-of-last resort program in the instance that there are widespread student loan access problems and take all available steps to ensure these plans can become operational quickly, if necessary. As you know, under existing law FFELP guaranty agencies are obligated to serve as lenders-of-last resort to avert any possible problem in access to student loans, thereby providing a nationwide network of backstop lenders. Further, you have the authority to advance federal funds to guaranty agencies to provide them with loan capital if needed. While such a program has not been previously implemented for the FFELP, the Department had established such a plan in 1998, when some FFELP lenders were then indicating that they might withdraw from the guaranteed loan program. Updating these plans now will help ensure that deploying such a contingency can be done at the first sign of any problems experienced by schools or borrowers in obtaining Federal student loans from a FFELP lender.

Second, the Department of Education should take action to endure that the Direct Loan program is fully prepared to respond to any unanticipated increase in demand for the program. As you know, the Direct Loan program does not rely on private lenders and therefore will not be affected by the changes in the credit market. Based on our discussions with Department officials, financial aid officials from schools currently participating in the Direct Loan program, and others, we are confident that the program could help alleviate any potential problem that borrowers or schools may face should FFELP lenders continue to face difficulties and withdraw from the program. The Department needs to take steps to ensure its plans to facilitate and expedite a school’s transition from the FFELP to the Direct Loan program on either a temporary or permanent basis can be immediately executed, should a school so desire. In addition, it is important for the Department to ensure that adequate capacity exists to absorb any increases in additional loan volume.

Finally, we understand that you will soon be corresponding with colleges about the state of the Federal student loan programs. We request that in such correspondence you make readily available information on the option of participating in the Direct Loan program and on lender of last resort procedures.

We are encouraged that the Department has begun to examine these options, but we look forward to hear about further contingency plans that would allow the Department to act immediately to ensure all students and families continue to have access to federal student loans in a timely manner.

We stand ready to provide you with any needed assistance that you believe will be necessary in undertaking the two important steps outlined above.

Sincerely,

EDWARD M. KENNEDY
Chairman
Senate Committee on Health, Education,
Labor, and Pensions

GEORGE MILLER
Chairman
House Committee on Education and Labor