The credit crunch bringing down our economy has now spread to student loans as PHEAA (Pennsylvania Higher Education Assistance Agency) announced it will cease making federally backed student loans. It has been joined in this by The College Loan Corporation. Problems with debt of all types are now spreading to the student loan area which will make things difficult for young people trying to afford the skyrocketed cost of higher education.
Of course PHEAA has had all sorts of scandals and problems over the past year. Lavish spending on retreats and perks for Board members, legal costs fighting news media requests for that information and their cluelessness about their extravagant behavior ruined the agency's reputation. PHEAA's management seemed completely oblivious to the public perceptions that they didn't understand their mission. This new development will prompt these critics to say "I told you so" and point at all those lost dollars as money which could have been used to actually finance loans for students.
Far be for me to say it though...
Update: Congressman Kanjorski moved today (March 4th) to avert more serious repercussions in the student loan market:
“The current credit crunch is now deeply affecting the student loan industry. In light of PHEAA’s recent action, I renew my call on the Administration to work to resolve these matters,” said Chairman Kanjorski. “Without quick action by the Administration to shore up the student loan market, other providers may make similar decisions.”
Many student loans lenders in the Federal Family Education Loan Program (FFELP) are facing liquidity problems as a result of the credit crunch. One such lender, the Pennsylvania Higher Education Assistance Agency (PHEAA), last week stated that it would suspend its participation with the program as of March 7. Another major student loan lender, College Loan Corporation, also recently announced that it would end its participation in the FFELP.
In Pennsylvania alone, about 600,000 Pennsylvania students currently attend post-secondary schools with the assistance of low-cost federal loans. Currently, 80 percent of students nationwide obtain their school financing through FFELP. If other lenders make similar decisions, these students could face serious difficulties in financing their educations.
“To fix these problems, the Administration has several options,” added Chairman Kanjorski. “They include having the Federal Financing Bank purchase federal student loans, modifying the rules of the Federal Home Loan Banks to permit the use as eligible collateral of federally guaranteed student loans and securities pools of such loans, or permitting FFELP lenders to access funding through the Federal Reserve.”
Specifically, to provide stability to student lenders the Administration could direct the Federal Financing Bank, which is already authorized to purchase obligations issued, sold, or guaranteed by federal agencies, to buy federally guaranteed student loans. The Administration could also modify the rules of the Federal Home Loan Bank System to permit the use as eligible collateral of federally guaranteed student loans and securities backed by such loans. Finally, the Administration could use the emergency authority of the Federal Reserve to allow FFELP lenders to access funds through the Discount Window program or to participate in the newly created Term Auction Facility program.
Chairman Kanjorski also believes that the U.S. Department of Education should prepare to implement the lender-of-last resort program should the problems in the student loan market worsen. Under the Higher Education Act, FFELP guaranty agencies must serve as lenders-of-last resort to prevent any possible problems in access to student loans by providing a nationwide network of backstop lenders. While this program is, as its title says, a last resort, Chairman Kanjorski wants the Education Department to be prepared for such action.
Additionally, Chairman Kanjorski today released a letter sent late last week to the Chairman of the House Committee on Education and Labor, Congressman George Miller (D-CA), urging him to work to protect the viability of the FFELP in order to ensure that students continue to receive needed loans. One day later, Chairman Miller and Senator Edward Kennedy (D-MA), the Chairman of the U.S. Senate Committee on Heath, Education, Labor, and Pensions, sent a letter to Education Secretary Margaret Spellings. They called on her to take steps to ensure “…that recent activity in the credit markets does not adversely affect students’ ability to secure federal student loans in a timely manner.”
“We are still awaiting some announcement from the Administration that they are working to address these problems,” concluded Chairman Kanjorski. “Many Members of the House Financial Services Committee in the letter that I previously sent on February 15, and now Chairman Miller and Chairman Kennedy, have reached out to the Administration to urge action on this issue that will greatly affect the lives of students throughout the country. American students cannot afford to lose their financial aid. These officials must act soon.”