WASHINGTON - Key Democratic Senators joined members of the House last week in urging the Bush administration to intervene in the student loan markets by making federal funding available, as increasing numbers of lenders are exiting the market.
Sen. Chris Dodd, the chairman of the Senate Banking Committee, said the credit crisis has now spread from the mortgage market to student loans and other areas, and urged the Bush administration to make funds available to student lenders through the Federal Reserve’s new credit facility or through the Federal Finance Bank, an emergency government lender.
“The contagion effect now is spreading across our economy,” said Dodd, during last week’s hearing on the emerging crisis in the student loan market. He said 50 lenders, many of them major ones, have exited the market in recent weeks, eliminating funding for millions of students preparing to pay next year’s college tuition.
Dodd’s call to the Bush administration comes weeks after similar pleas for intervention were made by House Democrats to Treasury Secretary Henry Paulson and Education Secretary Margaret Spellings.
The student loan market has been slammed in recent months by the effects of last year’s legislation cutting federal subsidies and guarantees on the Federal Family Education Loan Program and by the ongoing credit crisis, which has drained liquidity from the bond market and made it hard to sell student-loan asset-backed securities.
So far, credit unions have been unaffected by the crisis in the secondary market because most credit unions hold their loans, with a few having long-standing contracts to sell them to Sallie Mae. But Sallie Mae has itself retrenched in recent months, cutting back on its participation in the federal program and announcing this week it will no longer make consolidation loans.
Credit union lobbyists asked Congress this week to exempt them from some of last year’s subsidy cuts by allowing them to step in as non-profits for as many as half-dozen non-profit state agencies in Pennsylvania, Iowa, Michigan, Indiana and Texas that have exited the program in recent weeks.
Representatives from USC FCU, University of Wisconsin CU and University (Texas) FCU, met with representatives of the House and Senate last week to lobby for the exemption. Amending this Act to include credit unions in this definition of “eligible not-for-profit” lenders would substantially (benefit) credit unions in their efforts to meet market demands and fill the void being left by other lenders,” said NAFCU President Fred Becker in a letter to Dodd.
Meantime, more credit unions are joining the exodus form the guaranteed student loan program.
Spokane Teachers CU said last week it is joining the growing number of lenders who are leaving the guaranteed student loan program, known formally as the Federal Family Education Loan Program.
“It was a hard decision for us, and to be a teachers credit union, to make,” said Steve Dahlstrom, president of the $1-billion credit union, which holds $10 million of the guaranteed loans. “If we can find a way back into this we will.”
Dahlstrom cited the declining returns on the guaranteed loans–the 6.8% rate will be halved to 3.4% by 2010–and the lowered guarantees, 100% to become 95%.
But just as important, he said, is the increasing competition from the government’s own direct student loan program, which has prompted some local colleges to abandon all preferred lenders. “We’ve had a couple of colleges tell us out here in Spokane we’re going to go with just one lender, the U.S. government,” he told Credit Union Journal. “They (the federal government) set the rates; they set the rules, regardless of what our costs are.”
“It’s the squeeze,” said Dahlstrom, referring to the two conditions pressuring student lenders.
