WASHINGTON Lenders are dropping out of the federally backed student loan business in droves, fleeing an environment squeezed of cash because of the credit crunch.
The call for government action is getting louder, just as the pile of loan applications gets higher on the desks and kitchen tables of students headed to college next year.
Forty-six student lenders have stopped making federally guaranteed student loans, either temporarily or permanently.
Distress in the $330 billion market for auction-rate securities in recent months has rippled into the student loan market, and several states have suspended their college loan programs. The 46 lenders accounted for 12 percent of the federally backed student loan market, according to FinAid.org, a Web site focused on student lending.
Companies including Washington Mutual Inc., Sovereign Bancorp Inc., College Loan Corp., CIT Group Inc., NorthStar Education Finance Inc., HSBC Bank USA and Zions Bancorp have stopped issuing federally guaranteed student loans in recent weeks. And state agencies in Iowa, Michigan, Montana and Pennsylvania have suspended college loan programs.
The major federal student loan program is providing an estimated $50 billion in loans to 6.4 million students in the current academic year.
Against the backdrop of the housing and financial market turmoil and the $30 billion federal rescue of stricken investment bank Bear Stearns Cos., politicians are making the case that access to education, like homeownership, is a vital social goal that deserves protection.
"There is a growing concern in Congress," said Sarah Flanagan, vice president of government relations at the National Association of Independent Colleges and Universities. "We don't know if we're over the hump, or if this is going to be a crisis."
This week, Rep. Paul Kanjorski, D-Pa., proposed legislation designed to pump money temporarily into the student loan market.
Kanjorksi's bill would permit the 12 regional banks that make up the Federal Home Loan Bank system to invest their surplus funds in securities backed by student loans and to accept such securities as collateral. The banks also would be able to make money available to the banks and thrifts in their regions for student loans.
Another House bill, sponsored by Rep. George Miller, D-Calif., was unanimously adopted Wednesday and sent to the House floor by the Education Committee, which he heads. It would give the Education Department temporary authority to buy up loans from student lenders to ensure their access to capital. In the Senate, Sen. Edward Kennedy, D-Mass., chairman of the committee dealing with education, has proposed similar legislation.
Kanjorski, a key member of the House Financial Services Committee and 31 other lawmakers of both parties recently asked the Federal Reserve which orchestrated the Bear Stearns rescue to inject cash into the student loan market by using a special lending operation. But Fed Chairman Ben Bernanke responded in a letter that since a shaky student loan market doesn't threaten the financial system, it's not the central bank's job to steady it.
No student has been unable to get a loan a fact pointed out by Education Department officials and some education experts. With some 2,000 lenders participating in the Federal Family Education Loan Program, other lenders have been able to jump in when affected lenders stopped making loans, they say.
"There's an alarmist overreaction," said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers.
But lawmakers want a contingency plan. And after pressing Education Department officials for details of one at a recent hearing, they've got one. Education Secretary Margaret Spellings says she is providing a safety net in the event the government's help is needed. Kennedy's bill would allow the Education Department to use government funds to finance student loans.
The recent squeeze on student lending is tied to trouble in the market for auction-rate securities, about $80 billion of which is made up of bundles of student loans. Since some of these investments are backed by troubled bond insurers, investors have been reluctant to buy the securities, straining the student lenders that sell them to raise case.
The entire student loan industry has been under pressure for some time, however. Student loan legislation that took effect last October halved the interest rates on federally backed student loans, but paid for that by cutting $20 billion in federal subsidies to student lenders. In addition, rising delinquencies starting last year on student loans became a problem especially for private student loans, those that are not backed by the government and have higher interest rates that are not capped.
Sallie Mae, the nation's largest student lender, said earlier this year it would cut back on its private loans to students it believes have a lesser chance of graduating. Another challenge for parents is that home prices are sinking in much of the country, making it harder to tap into home equity to pay tuition bills.
With all of these changes afoot, parents evaluating financial aid packages this spring shouldn't delay in determining how much they need to borrow, said Vince Pecora, director of financial aid at Towson University in Maryland. "Typically families wait longer than we wold like to assets the amount of additional assistance" they will need, he said.
Sallie Mae, formally known as SLM Corp., has been rocked by financial losses, a failed buyout and management stress, yet a $30 billion credit it secured from major banks earlier this year insulates it some from the auction market turmoil.
Also insulated are big banks like Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., Wachovia Corp. and Wells Fargo & Co. for which student lending is a small corner of their overall business.
For them, the departure of other lenders could be a potential boon.