Will my child be able to get a Student Loan for College?

The disaster in the US Credit Markets are now hitting young people. Applicants to colleges and universities in the United States are finding that although their grades may have gotten them in to the school they have dreamed of attending, they may not have the financial ability to attend in the fall. The credit crunch is now limiting the ability of students and their parents from obtaining the needed student loans for tuition.

Rep. Miller, Sen. Kennedy write to Secretary Spellings on credit market stress and federal student loan programs

U.S. Rep. George Miller (D-CA), chairman of the House Education and Labor Committee, and U.S. Senator Edward M. Kennedy (D-MA), chairman of the Senate Health, Education, Labor, and Pensions Committee, sent the following letter today to U.S. Education Secretary Margaret Spellings to urge the Secretary to put plans in place to ensure that students and families have uninterrupted access to federal student loans in the unlikely event that stress in the credit market leads lenders to reduce their activity in the federal guaranteed student loan program, formally known as the Federal Family Education Loan Program.

Text of the letter written to the US Secretary of Education

The Honorable Margaret Spellings Secretary of Education

U.S. Department of Education

400 Maryland Avenue, SW

Rm. 7W301

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 ensure 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 hearing 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,

GEORGE MILLER Chairman

House Committee on Education and Labor

EDWARD M. KENNEDY Chairman

Senate Committee on Health, Education,

Labor, and Pensions

To the dismay of many parents and students the credit crunch that started with home mortgages has spread to the student loan market.

The credit crunch is being caused by lenders that have had high risk mortgages default, which has led to banks retreating from some loans, Stephen Ferris, MU finance professor and J.H. Rogers Chair of Money, Credit and Banking, said.

Failures earlier this month in the auction rate securities market are troubling for student loans.

An auction rate security or ARS is a short term investment like a bond. Rates are set at auctions, every week or month, according to demand from investors and sold for cash.

A problem occurs for student loan agencies when ARSs don’t sell.

“If they don’t sell then there’s no capital to lend out,” said Ferris.

Last week the Michigan Higher Education Loan Authority, said it will temporarily stop one of its student loan programs. It will stop making loans under the Michigan Alternative Student Loan, or MI-Loan program.

The agency said on its website, MI-Loans will stop “due to the current and unprecedented capital-markets disruption.”

Other states are having problems too.

According to The Des Moines Register, the Iowa Student Loan Liquidity Corporation informed Iowa colleges and univeristies that it would be unable to properly fund student loans for next school year. Although, a few Iowa banks have stepped in to take on some loans there is still uncertainty about the future of student loans in Iowa.

The Montana Higher Education Student Assistance Corporation was unable to sell $300 million of bonds on the auction rate market, according to the Missoula Missoulian. Although it was a major loss, the agency said funding for next school year is secure.

Missouri has also been hit by the credit crunch. Missouri’s student loan agency, Missouri Higher Education Loan Authority or MOHELA, posted its first loss since its inception, The St. Louis Business Journal reported.

What does this mean for students?

Students should be aware that student loan rates will probably go up and it will be harder to get them but they need not worry. MOHELA will have enough capital to fund student loans for next year, although they will most likely break even, The St. Louis Business Journal reported.