The Department of Education announced plans to expand the department’s ongoing loan purchase program Friday in the hopes of continuing to stabilize the credit market for college students and families seeking education loans in light of the current economic crisis.
“This is sort of the student loan bailout program,” University Financial Aid director Yvonne Hubbard explained. “The federal government is basically buying the loans from the banks so they have more credit to give to students.”
Conwey Casillas, managing director of public affairs for student loan provider Sallie Mae, said the federal government will either loan money to private lenders or give these lenders the opportunity to sell their loans to the government to generate capital. This program has been in practice since May 2008, Casillas said, but for the 2009-10 school year, the government expanded the program so the private sector could sell loans initiated as long ago as 2003 to get the necessary capital to fund new student loans.
“That should give us the necessary certainty for students, parents and schools to know that student loans will be available through 2010 and beyond,” he said, noting though, that Sallie Mae does not anticipate the government will need to step in and purchase its loans.
The loan buyback program, however, is not without drawbacks, Casillas said, because there are some negative implications associated with the government’s intervention in the student loan market. In the past, third-party lenders such as Sallie Mae or Bank of America were able to offer incentives to borrowers such as lower interest rates. Under the expanded program, Casillas said, the government only will buy back loans similar to those the federal government offers.
Casillas noted the loan-buying program ensures the long-term viability of college loans but makes it more difficult for lenders to offer the same kind of interest rates seen just several years ago.
These borrower benefits have all but disappeared in today’s market, Casillas said, and more schools are moving away from these private lenders toward a system of direct lending from the government.
Tim Ranzetta, founder of Student Lending Analytics, said while only 19 percent of schools participated in a direct lending program for the 2007-08 school year, about 30 percent are taking that route this year.
Hubbard noted that student loans are more expensive this year since the buyback program was initiated than they have been in the past, adding, “We just have to go day by day in today’s economy.”
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