Economics of Guaranteed Student Loans (CRS Report for Congress)
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| Release Date |
Aug. 8, 2008 |
| Report Number |
RL34578 |
| Report Type |
Report |
| Authors |
D. Andrew Austin, Government and Finance Division |
| Source Agency |
Congressional Research Service |
Summary:
Since 1966, the federal government has provided guarantees and subsidies to approved private lenders or certain state government entities that make student loans. College graduates' enhanced human capital is generally not viewed as collateral. Lenders, without federal subsidies and guarantees, would charge interest rates more in line with other unsecured loans, such as credit card debt, that could push the financial costs of higher education beyond the reach of many students and their families. Although federal subsidies for student lenders have probably expanded access to higher education, some observers have contended that subsidy rates were higher than necessary to ensure students' access to educational loans.
The College Cost Reduction and Access Act (P.L. 110-84), enacted in September 2007, was motivated, in part, by the impression that lender subsidies within the Federal Family Education Loan (FFEL) program had been higher than necessary. The act cut interest rate subsidies to lenders and increased the proportion of default costs borne by lenders.
Starting in February 2008, some student lenders encountered difficulties in the secondary loan marketâa market in which securities backed by bundles of student loans, often called SLABS (student loan asset-backed securities), are sold to investors. Turmoil in world capital markets in late 2007 and 2008 appears to have raised interest costs to some student lenders. Specifically, widespread failures of auction-rate securities markets beginning in mid-February 2008 have raised costs of funds for some student lenders.
In early 2008, some FFEL program lenders announced plans to make fewer student loans within certain market segments in response to a tightened credit market and recent legislation. In particular, some lenders have announced plans to reduce the number of loans to students attending certain institutions, such as two-year and proprietary schools. Some observers contend that student lenders have overstated their recent troubles. Nonetheless, loans remain available through the William D. Ford Federal Direct Lending Program (FDLP).
In response to growing concerns about the availability of student loans for the 2008-2009 academic year, Congress passed Ensuring Continued Access to Student Loans Act of 2008 (H.R. 5715; P.L. 110-227), which was signed into law on May 7, 2008. The act raises loan limits for Stafford loans (which some claim would reduce demand for private student loans), provides new options for parent borrowers, expands the lender-of-last-resort program, and allows the Secretary of Education to purchase FFEL student loan assets from lenders. The Secretary has announced plans to purchase student loans originated for the 2008-2009 school year.
Some Members of Congress and participants in the student lending market have called for consideration of additional measures that might introduce liquidity into the market for securitized student loans using the Federal Financing Bank or other federal entities. This report will be updated as warranted.
