Fed Moves to Enhance Liquidity in Student Loan Program

As the U.S. Congress approved emergency legislation to promote the availability of student loans in the face of the nation’s credit crunch, the Federal Reserve also was acting to free up capital for federal student loans.

The Fed announced that it would permit securities backed by federal student loans to be pledged as collateral by financial institutions borrowing Treasury securities from the Fed’s Term Securities Lending Facility. Previously, only mortgage-related securities had been accepted as collateral.

Established in March, the Term Securities Lending Facility allows dealers to offer relatively illiquid securities as collateral in exchange for a loan of Treasury securities. In doing so, the facility is designed to improve overall market liquidity conditions.

U.S. Rep. Paul Kanjorski, D-Pa., and Sen. Christopher Dodd, D-Conn., who have been urging intervention by the Fed in the student loan credit crunch, hailed the central bank’s announcement. “When coupled with the enactment of the Ensuring Continued Access to Student Loans Act of 2008, the Federal Reserve’s action will help to provide more liquidity to the student loan markets,” Kanjorski said. “It will also help to ensure that students and their families have access to the loans they need to achieve their higher education dreams.”