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Government Will Assist Student Loan Companies

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By NANCY ZUCKERBROD

The Associated Press

Published: May 22, 2008

WASHINGTON - Student loan companies, squeezed by the credit crisis, are getting some help from the federal government.
Education Secretary Margaret Spellings told the lenders - in a letter obtained by The Associated Press - that the government will purchase some of the loans, freeing up capital. That way, the companies will have more money to issue new loans.

"Many lenders today do not have access to funds at a cost that justifies originating new loans," Spellings wrote.

"Our plan is designed to provide viability in the marketplace for lenders who step up and make loans in this difficult environment."

Lenders had told the department that they needed more federal help to continue serving college students under the federal student loan program because of the credit crunch and cuts Congress made to lenders' subsidies. The credit crunch has made money less available.

Under the plan outlined by Spellings, the government will pay face value for the loans, plus accrued interest and the cost of fees lenders incur when originating loans.

Lenders would also get a payment of about $75 per loan.

One thing that still must be resolved is how the loans sold to the government would be serviced.

The banks want to continue servicing the loans, in part, to maintain relationships with existing customers, said Harrison Wadsworth, a lobbyist for the Consumer Bankers Association.

The administration also has agreed to invest in pools of loans, something the private market traditionally does but which has become less common due to the crisis in the financial markets. That is expected to make more capital available to lenders at reasonable rates.

The help provided to lenders is supposed to be cost-neutral to the government, so it's possible the terms of the offer to lenders may shift before being finalized. The help is only being offered for loans made for the 2008-09 school year.

Students are starting to put together financing plans for the fall semester now.

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