WASHINGTON Student-loan companies, squeezed by the credit crisis, are getting some help from the federal government.
Education Secretary Margaret Spellings sent lenders a letter on Wednesday stating that the government will purchase some of the loans, freeing 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."
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's also a step that should make more capital available to lenders.
Sallie Mae Chairman and CEO Albert Lord said the plan would allow the industry leader to stay in the federal student-loan program. "Sallie Mae will continue lending without breaking stride," Lord said in a call with college officials.
Lenders, including Sallie Mae, had been saying they needed more federal help to continue serving college students under the federal student-loan program. The credit crunch pushed up the cost of capital. Cuts Congress made to lenders' subsidies last year also reduced lenders' profit margins.
Under the plan Spellings outlined, 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 $75 per loan to defray estimated administrative costs.
One detail that still must be firmed up is how the loans sold to the government will be serviced. The letter says that the department will determine servicing arrangements based on factors such as cost and students' best interests.
The banks want to continue servicing the loans they originate, in part to maintain relationships with existing customers, said Harrison Wadsworth, a lobbyist for the Consumer Bankers Association. He said continuity in service would be helpful to students. Sallie Mae executives agreed.
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.
"Lenders need to evaluate what the department has put on the table and figure out what it means to them," Wadsworth said. "I think it's definitely a positive development though, overall, in terms of trying to make sure loans are going to be available this fall."
So far, dozens of lenders have left the federal student-loan program, but when that has happened, other lenders have stepped in or students have turned to a smaller program, in which the Education Department makes loans directly to students.
Students are starting to put together financing plans for the fall semester.
"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," Spellings said in a statement.
Spellings also said the Education Department was working to ensure the smaller program, under which the agency makes loans directly to students, can handle any increase in volume.