Will College Students Face a Student Loan Shortage?

Reports that more than 60 education lenders have dropped out of the student loan program or have scaled back their loan originations are prompting students and their parents to question whether they’ll have access to the financing they need to pay for their classes. Education lenders are being squeezed by the twin pincers of some $38 billion in cuts enacted in federal legislation in the last two years and the fallout from the subprime mortgage lending meltdown that has dramatically increased some lenders’ costs of the funds to make student loans.

Despite the current challenges in the student loan marketplace, recent developments provide reason for optimism that students will continue to enjoy access to federal loan dollars.

Dealing With the Student Loan Credit Crunch
The U.S. House has passed, and the U.S. Senate is expected to soon consider, legislation that would help address the challenges many education lenders are facing in obtaining affordable financing for student loans. Included in both measures is a provision that would permit lenders to sell their loans to the U.S. secretary of education to raise fresh capital for funding new loans. Separately, legislation has been introduced in Congress to tap financing through the Federal Home Loan Banks to support student loans. Other legislative initiatives may also be introduced.

Because of the bipartisan nature of these initiatives and the urgency with which they are being pursued, I am optimistic that a solution will be in place to ensure the majority of students can continue to access loans through the Federal Family Education Loan Program.

Backup Plans
Even if liquidity is restored to the FFELP, there may be isolated gaps in student loan access. Maintaining loan access for all students is critically important, and we are committed to ensuring that all eligible students at all eligible schools receive the loans to which they are entitled.  

To address potential gaps in student loan access, USA Funds^®, the nation’s other 34 student loan guarantors, and the U.S. Department of Education are finalizing contingency plans for guarantors to serve as lenders of last resort, if necessary. Under existing authority in the Higher Education Act, guarantors can serve as or designate lenders of last resort for otherwise-eligible students who cannot find a lender willing to make FFELP loans to them. Using private capital or funds advanced from the federal Treasury, these lenders of last resort can help ensure access to federal student loans for all eligible students.

We will share our lender of last resort plans with schools and lenders, once the Department approves them.

Another potential backup is the William D. Ford Direct Loan Program. Education Secretary Margaret Spellings has told Congress that the Education Department is ready to assist postsecondary institutions that choose to participate in the direct loan program. There are limits, however, to the amount of new volume the direct loan program can manage. Moreover, many FFELP schools will be unable to make the administrative changes necessary to make the transition to the direct loan program in such a brief period.

USA Funds’ Support of Higher Education Access
USA Funds stands ready to assist with financial access to higher education. We are prepared to fulfill our statutory obligation to serve as a lender of last resort, if called on to do so. We also offer a new tool, USA Funds Loan Comparison, powered by SimpleTuition, to help students compare their education loan options.

Student loan guarantors are shouldering a portion of the $38 billion in FFELP cuts imposed by Congress during the past two years, and USA Funds has had to make adjustments. We’ve eliminated one small scholarship program, and trimmed some of our spending on research and development. Even so, we have not had any staff reductions and we don’t foresee any under current conditions.

We are committed to continuing to deliver the finest education loan services available. For example, we’re also moving full speed ahead with new and enhanced services that will directly support student loan borrowers’ ability to make better decisions about taking on and managing their debt effectively, including an online version of our popular USA Funds Life Skills^® financial literacy curriculum and new online loan counseling programs for graduate and professional students.

We will also continue to deliver an expansive array of access and outreach programs, including our USA Funds Unlock the Future^® and USA Funds Consejos early awareness programs for middle school students and their families, and the award this summer of more than $3 million in first-time scholarships to low- and moderate-income students nationwide to pay college expenses during the 2008-2009 academic year.

These are the most challenging times I’ve experienced in the student loan program. But the fact that people on both sides of the aisle — regardless of their preference for one loan delivery system or another — are focused on ensuring financial access to college leads me to believe that every qualified student will be able to count on federal education loan dollars this fall.

Carl Dalstrom is president and CEO of USA Funds.