WASHINGTON — Student loan companies, squeezed by the credit crisis, are getting some help from the federal government.
Education Secretary Margaret Spellings told the lenders in a letter obtained by The Associated Press that the government will purchase some of the loans, freeing up capital. That way, the companies will have more money to issue new loans.
“Many lenders today do not have access to funds at a cost that justifies originating new loans,” Spellings wrote. “Our plan is designed to provide viability in the marketplace for lenders who step up and make loans in this difficult environment.”
Lenders had told the department they needed more federal help to continue serving college students under the federal student loan program because of the credit crunch and cuts Congress made to lenders’ subsidies. The credit crunch has made money less available.
Under the plan outlined by Spellings, the government will pay face value for the loans, plus accrued interest and the cost of fees lenders incur when originating loans. Lenders would also get a payment of about $75 per loan.
One thing that still must be resolved is how the loans sold to the government would be serviced. The banks want to continue servicing the loans in part to maintain relationships with existing customers, said Harrison Wadsworth, a lobbyist for the Consumer Bankers Association.
The administration also has agreed to invest in pools of loans, something the private market traditionally does but which has become less common due to the crisis in the financial markets. That is expected to make more capital available to lenders at reasonable rates.
The help provided to lenders is supposed to be cost neutral to the government, so it’s possible the terms of the offer to lenders may shift before being finalized. The help is only being offered for loans made for the 2008-09 school year.
“Lenders need to evaluate what the department has put on the table and figure out what it means to them,” Wadsworth said. “I think it’s definitely a positive development though, overall, in terms of trying to make sure loans are going to be available this fall.”
So far dozens of lenders have left the federal student loan program, though where that has happened other lenders have stepped in or students have turned to a smaller program in which the Education Department makes loans directly to students.
Students are starting to put together financing plans for the fall semester now.
California Democratic Rep. George Miller, chairman of the House education committee, said in a statement that the offer to lenders is sound.
“Our goal is to ensure that students and families continue to have uninterrupted access to the federal college loans for which they are eligible,” he said. “To this end, it’s important that lenders be able to continue to participate in the federal student loan program.”
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