Senate Votes to Expand Student Loan Access

By Dino Tsibouris

We represent a number of student lenders with respect to their online lending operations. In the past several months we have observed a number of unique events in the marketplace, ranging from the reduction of interest rates in federally-insured student loans that have made the business financially unattractive to banks, to disruptions in the bond markets that have impaired the ability of lenders to obtain funds to make student loans. Many lenders have suspended student lending activity temporarily, stopped making certain types of student loans, or completely left the business and focused on other opportunities.

Students are now faced with increasing tuition costs at the same time that their access to student loans has substantially declined. To address these concerns, the senate yesterday approved The Ensuring Continued Access to Student Loans Act of 2008 (similar to a bill that recently passed the house) to increase the amounts borrowers may obtain in federally-insured student loans. Both the senate and house bills would also allow the Department of Education to buy existing student loans from lenders to free up their capital and allow the lenders to make new loans. President Bush is expected to sign the new legislation. It is important to note that the proposed legislation aims to increase borrowers access to FFELP loans, but does not affect private student loans that are not guaranteed by the government.

Interestingly, Federal Reserve Chairman Bernanke was quoted in the Wall Street Journal today as having sent a letter to senators inviting them to revisit their earlier decision to cut interest rates on federally-insured loans to entice lenders to return to the marketplace. Time will tell.