Daily Aid 35: Federal student loans get a shot in the arm

Student Financial Aid News

From Inside Higher Ed:

In addition to replicating the loan purchase and pool investment programs it put in place for 2008-9, which would cover loans made through September 30, 2010, the department plans to allow for the creation of “conduits” (likely to be banks or big student loan providers like Sallie Mae) that are designed to be a middleman between groups of lenders and outside investors. Under these arrangements, the conduits would (using funds from private sources, not federal money) purchase student loans that were fully disbursed between October 2003 and July 2009 (only non-consolidated loans would qualify), and the entities would then issue “asset-backed commercial paper” (a form of short-term investment vehicle) to private investors.

From the US Department of Educaiton Press Release:

The Administration intends to provide liquidity support to one or more conforming Asset-Backed Commercial Paper (ABCP) conduits. These conduits will purchase FFELP loans, providing longer-term stability to the guaranteed student loan marketplace. The Department intends to make all fully disbursed, non-consolidation FFELP loans awarded between October 1, 2003 and July 1, 2009 eligible for this program. An eligible lender trustee creates a pool called a conduit, to which other lenders transfer ownership of their student loans. This conduit issues commercial paper to sell, backed by the loans in the pool (Asset-Backed Commercial Paper). After private investors purchase the commercial paper (CP), student lenders would be paid out of the amounts received from these investors. The Department of Education will provide liquidity to the facility by entering into forward purchase commitments with these eligible lender trustees, whereby the Department promises to purchase, at a date in the future, eligible student loans at a prearranged price if the commercial paper that has been issued by the conduit cannot be re-issued or “rolled” at maturity and the conduit does not have sufficient cash to repay commercial paper investors.

Commentary

Talk about a poorly written press release. Here’s the summary in terms that normal people can understand:

The Department of Education will buy up loans that student loan companies can’t sell on the market.

What does this mean for you? Almost nothing from a loan servicing perspective. If you take out federal student loans from any lender, your paperwork will not change - who you pay your bills to will not change (unless you consolidate your student loans). This is a user-friendly regulatory change.

What it does mean in the bigger picture is that student loan companies will have access to more capital - cash - to make loans with, because the federal student loans themselves can be sold back to the Department of Education. This in turn means that federal student loans such as the Stafford loan and PLUS loan will remain widely available - you as a student should have absolutely no trouble securing federal student loans at all for the coming year.

This regulatory change does not impact private student loans (non-government student loans) however, so if you rely on private student loans for any significant portion of your educational funding, these will likely remain hard to get.

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