Federal Updates

Secretary of Education releases plan for purchasing loans and restoring FFELP liquidity

In a letter to the chief executive officers of FFELP lenders released on May 21, ED Secretary Margaret Spellings outlined a four-part contingency plan with the goal of "ensuring continued and timely access to federal student loans for all eligible student and parent borrowers." The letter is ED's first widespread public response to the authority it was granted in the "Ensuring Continued Access to Student Loans Act of 2008" (P.L. 110-227) and comes on the heels of a series of meetings with FFELP industry participants over the last several weeks. The letter also follows the recent exit of multiple lenders from the FFELP — and the discussion and threat of exit by others, including several with historically-large FFELP volume.

The four parts of the plan include:

• A strategy for purchasing loans from lenders for the 2008-09 academic year and for offering lenders short-term liquidity. See the "Loan purchase" and "Short-term liquidity" subheadings below for further details.
• A statement on ED's long-term commitment to the continuation of the guaranteed student loan program. The letter states that the current administration is committed "to designing programs that respect and support the current FFEL Program as a successful public/private partnership, while protecting taxpayer interests" and, later, "to maintaining a strong, competitive FFELP."
• A reiteration of ED's intention to implement the lender-of-last resort (LLR) program, if necessary. ED provided more details regarding how this program would be put into place in Dear Colleague Letters (DCLs) GEN-08-03 and GEN-08-05.
• A statement regarding the Federal Direct Loan Program's capability to handle an increase in loan volume. Secretary Spellings states that ED has the capacity to double the current Direct Loan origination volume, "although we are confident that our liquidity and LLR programs will reduce the need for institutions to shift to the Direct Loan Program." This portion of the letter also mentions ED's efforts to contend with "the hardware, software, and human resource constraints" associated with this potential increase in Direct Loan originations.

Loan purchase
ED states in the letter — in accordance with P.L. 110-227 — that it will soon issue a notice in the Federal Register with the terms and conditions under which ED will purchase FFELP loans. This notice is anticipated by June 1. In the meantime, the letter provides the following tentative terms for this purchase.

According to the letter, ED will enter into agreements with lenders by July 1, 2009, to purchase eligible FFELP loans (originated for the 2008-09 academic year), with the option for lenders to complete the sale by September 30, 2009. Lenders who enter into these agreements will continue to hold and service their loans until September 30, 2009. If the capital markets improve, lenders may ultimately decide not to sell to ED. However, if a lender does sell to ED, the price that ED will pay for an eligible FFELP loan is equal to the sum of (i) par value, (ii) accrued interest (net of special allowance payments), (iii) the 1 percent origination fee that the lender paid to ED, and (iv) a fixed amount of $75 per loan (used to defray the lender's estimated administrative costs). For a loan sold under these terms, control of loan servicing transfers to ED.

ED is expected to release a "term sheet" with a fee schedule and other details of this loan purchase program shortly.

Short-term liquidity
Some lenders may not have available funds for the 2008-09 academic year, and may need capital now to continue making FFELP loans. For these lenders, ED will purchase participation interests in pools of loans made by lenders for the 2008-09 academic year and will hold such participation interests up to September 30, 2009. The participation interests will be priced to yield to ED the commercial paper rate plus 50 basis points. Here's how this program will work.

New loans originated by FFELP lenders under this program will be put into short-term trusts; ED will then buy participation interests in these trusts. Upon expiration, a trust may refinance the loans in the private financial market and pay off ED's participation interest or sell the loans to ED (under the terms mentioned under "Loan purchase" above). All loans made using these participation interests are originated and serviced as FFELP loans.

More information
To access ED's letter — which was posted as an Electronic Announcement on the Information for Financial Aid Professionals (IFAP) website — go to http://www.ifap.ed.gov/eannouncements/052108FFELPMonitoring.html. Shoptalk Online will keep readers informed of any new developments on the loan purchase and short-term liquidity fronts as they arise.

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Congress passes another HEA extension

If you're thinking that the title of this article seems familiar, it's with good reason — Shoptalk Online reported the previous extension of the Higher Education Act (HEA) just two weeks ago. This most recent extension, S. 3035, is the fourth such bill to be approved in the last 7 months. S. 3035 is a clean extension of the HEA through June 30, 2008, and has been sent to the president for his signature.

Best laid plans
Members of the committee that is negotiating a compromise reauthorization bill have attempted in earnest to develop a piece of legislation acceptable to all parties before the previous HEA extension expires on May 31. However, progress on the bill has been thwarted by an unfortunate confluence of events. The conferees have been unable to reach agreement on a few key issues, necessitating lengthy discussions between House and Senate conference committee members. Additionally, the Memorial Day recess has placed increased pressure upon lawmakers to conclude proceedings on a variety of legislative issues, some perhaps deemed more critical than reauthorization of the HEA. Finally, Senator Edward Kennedy's illness and unexpected absence from the Senate has been keenly felt; his leadership on education issues, in particular HEA reauthorization, is deeply respected by members on both sides of the aisle and is deemed vital to completion of the process.

For more information
Shoptalk Online will keep readers apprised of progress dealing with the reauthorization process. To access the text of S. 3035, go to Thomas, the U.S. Congress website, at http://thomas.loc.gov/. In the space for "Search Bill Text," enter "S. 3035," click on "Bill Number," and click "Search."

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