WASHINGTON - In an effort to add liquidity to the troubled student loan market the Federal Reserve has expanded its term securities lending facility to include top-rated student loan asset-backed securities as collateral for advances.
The Fed’s special loan facility was created earlier this year to add liquidity to the mortgage market by accepting highly rated mortgage backed securities for collateral on loans.
The Fed’s action comes as the U.S. Department of Education announced it will now buy portfolios of loans from the loan companies, thereby giving them more cash to lend to more students.
The secondary market for student loans has seized up in recent months as credit worries have spread from the mortgage market, leading dozens of lenders to exit the market for student loans. The secondary market is critical for the largest providers of student loans, who package their loans as bonds and sell them off, creating additional funding for more loans, just as in the mortgage market.
Most credit unions hold their student loans, but others sell them to Sallie Mae, the main player on the secondary market.
