WASHINGTON – The Bush administration unveiled its plan yesterday to bail out the troubled student loan market by offering to buy federally guaranteed loans from lenders and eventually providing emergency funding so the lenders can make more loans.
The effort, enabled by emergency legislation passed last month, comes as millions of students are applying for financial aid in preparation for the fall’s academic semester.
Under the plan, the Department of Education will pay the face value of the loans, plus accrued interest and the cost of fees lenders incur when originating the loans. Lenders would also get a payment of $75 per loan.
The government has also agreed to invest in pools of loans in order to pump new liquidity into the secondary market, which has been hit by the exodus of dozens of lenders in recent months.
Credit union participants in the student loan market were watching to see how the plan will affect them. "We feel it’s a good step towards curbing the exodus of student loan lenders and provides an adequate back-up plan to sell loans to (the Education Department) for those lenders needing liquidity to make new loans," said Michael Kim, head of student lending at USC CU, in an email message yesterday. He said there are still several questions to be cleared up, including how the borrower will benefit and what will happen to ACH discounts in repayment.
Congressman Paul Kanjorski, D-Penn., who has been working to get the government to intervene in the market, said the initiation of the plan is urgent as it come at the start of the peak origination season. He urged the Education Department to allow existing lenders to continue to administer and service the loans to avoid borrower confusion and frustration.
