Federal Government Will Bail Out Student Lenders
The Federal Government announced plans yesterday that will rescue student loan companies from economic turmoil for at least the coming school year. The government's proposal is expected to avert what some had seen as a pending crisis in the availability of student loans for the 2008-2009 school year. Major lenders, including Sallie Mae, immediately promised to remain participants in the Federal student loan system after threatening in recent weeks to quit the system.
A major component of the plan would allow loan companies to sell the government packages of loans that they were issued at the end of the coming academic year. The government will also pay loan companies the amount owed by the borrower on the loan, along with a $75-per-loan fee and a 1 percent reimbursement fee. The government will also issue low interest loans to lenders, using their current student loan portfolios as collateral, so that lenders can write new loans for students.
The net effect of the proposal will be to keep liquidity in the student loan industry, which will insure that students seeking government-backed student loans will be able to find lenders willing to write them. Interest rates on Federally-subsidized student loans will not rise in the coming year. However, the proposal will not fix what many say are long-term inefficiencies in the student loan marketplace.
"We want students to be able to concentrate on their studies rather than worry about disruptions in the student loan market and whether they will be able to obtain federal loans to help pay for school. We hope families will be reassured that the U.S. Departments of Education and Treasury are acting to ensure loans remain accessible," said Department of Education Secretary Margaret Spellings in a press release . "At the same time, while offering these short-term solutions, we can also consider this a teachable moment that speaks to broader, long-term flaws in our complex and outdated financial system. This system has been crying out for reform for years, and especially in light of the ever-increasing cost higher education, students and families are counting on us to provide it."
Related Links:
Administration Unveils Plan to Protect Student Lenders, Washington Post
Education Agency’s Plan Shores Up Market For Loans To College Students, The New York Times
The Government Gets It Right, Inside Higher Education
