In an effort to head off a potential crisis in student loan availability, the federal government will buy loans from lenders, double the amount of loans it writes directly and bolster a "lender of last resort" program that helps low-income students finance college.
The moves announced Wednesday are aimed at reassuring skittish lenders that they will have ready access to cash throughout the 2008-09 college term, at a time when the credit market is moribund.
"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," Secretary of Education Margaret Spellings said in a statement.
"We hope families will be reassured that the U.S. Departments of Education and Treasury are acting to ensure loans remain accessible."
The Department of Education gained authority to buy loans and increase liquidity in the market through the Ensuring Continued Access to Student Loans Act, which Congress passed this month. The law also boosts the amount of money students can borrow each year under the federal student loan program.
The agency, which is charged with implementing the law, held more than 100 meetings with lenders and government attorneys over the last three weeks to come up with the strategy unveiled Wednesday. Time was of the essence because roughly 80 lenders have pulled out of the student loan market in the last three months, and several major players, including market leader Sallie Mae, had been threatening to do so.
Industry experts were concerned that further defections would leave students scrambling for cash when classes started in September. The department has now assured lenders and consumers that the credit crisis will not upend the coming school year, with the government effectively pouring cash into the loan market for the next 12 months, hoping that the credit markets recover next year.
"I would commend them on their speed and creativity in developing this short-term solution," said Robert Shireman, director of the Project on Student Debt in Berkeley. "It provides lenders with the same or similar access to funds that they had before the credit crisis, so that for at least the next year they will be able to make student loans like they did in the past."
In a conference call with school customers Wednesday, Sallie Mae reassured financial aid officers that it would continue to write new loans at least into the near future.
"The announcement was critical," said Bob Murray, spokesman for USA Funds, the nation's largest student loan guarantor. "Lenders are still waiting to hear some of the details, but this appears to be a positive step forward."