Student Lending: Education Department Announces New Program to Provide Emergency Funds for Lenders to Make Immediate Disbursements

December 16, 2008

On November 20, 2008, the U.S. Department of Education announced its newest program to ensure that students have access to loans made under the Federal Family Education Loan (FFEL) program. Under the newly created Short-Term Purchase Program, the Department will purchase from lenders certain fully disbursed FFEL loans originated for the 2007-08 school year.

The Short-Term Purchase Program is intended to provide enough liquidity to avoid the risk of lenders being incapable of making scheduled disbursements for the remainder of the 2008-09 school year. Through this program, the Department will purchase up to $500 million in loans each week, not to exceed $6.5 billion in the aggregate.

The program will end when the Asset-Backed Commercial Paper Conduit program (discussed below) becomes operational or on February 28, 2009, whichever occurs first.

What Loans Are Eligible?

Fully disbursed Subsidized Stafford, Unsubsidized Stafford, and PLUS loans so long as the loans were first disbursed on or after May 1, 2007 for the loan period beginning on or including July 1, 2007. The loans must have been made to pay the costs of attendance during the 2007-08 school year.

What Loans Are Not Eligible?

  • FFEL Consolidation loans.
  • Loans on which a default claim or other claim for payment has been filed with the guaranty agency.
  • Loans that are more than 210 days delinquent at the proposed time of sale.
  • Loans that are not free and clear of encumbrances, liens, or security interests.

What Will the Department Pay for the Loans?

The Department will purchase eligible loans at 97% of the principal and unpaid interest owed by the borrower — the standard rate of the federal guarantee.

What are Some of the Important Terms and Conditions?

  • Selling lenders must continue to originate new FFEL loans.
  • The Department will only purchase loans with borrower benefits that can be implemented by Federal Student Aid’s current servicing processes.
  • The Department will not purchase loans where a cash rebate was promised to the borrower.

What is the Asset-Backed Commercial Paper Conduit Program?

On November 10, 2008, the Department announced that it would provide liquidity support to one or more Asset-Backed Commercial Paper (ABCP) conduits that purchase FFEL loans.

All fully disbursed, non-consolidation FFEL loans awarded between October 1, 2003 and July 1, 2009 will be eligible for purchase by the conduit(s), which, in turn, will issue and sell commercial paper that is backed by the pool.

The Department will provide liquidity support by promising to purchase the student loans, at a later date and at a prearranged price, in the event the commercial paper cannot be reissued or rolled at maturity and the conduit has insufficient funds to repay the commercial paper investors.

Is the Federal Government Doing Anything Else to Jumpstart the Student Lending Industry?

The Department is implementing Purchase of Participation Interests and Loan Purchase programs to cover loans originated for the 2009-10 school year. Those programs will replicate the current programs that cover only the 2008-09 school year.

In addition, the Department has stated that it is taking the steps necessary to ensure that its Lender-of-Last-Resort program is ready to be used, if necessary.

And the U.S. Department of Treasury, under the Troubled Assets Relief Program (TARP), is taking actions. On November 25, 2008, Secretary Paulson announced that Treasury will allocate $20 billion to back a lending facility for the consumer asset backed securities market established by the Federal Reserve Bank of New York.

The facility, known as the Term Asset Backed Securities (ABS) Loan Facility, is intended to assist the credit markets in accommodating the credit needs of consumers and small businesses by facilitating the issuance of ABS and improving ABS market conditions. The underlying credit exposures of eligible securities initially must be newly or recently originated auto loans, student loans, credit card loans or small business loans guaranteed by the U.S. Small Business Administration.