Student aid available despite subprime woes: gov't

By Rachelle Younglai

WASHINGTON (Reuters) - The secretary of education on Friday sought to assure students that federal aid will continue to be available even as the subprime mortgage crisis has dried up credit.

"Let me assure you and especially students and families that federal student aid will continue to be available," Margaret Spellings told a House of Representatives committee on education and labor.

The credit crisis has spread beyond the banking and mortgage industry into other areas of the financial sector, such as student loans.

Some student loan programs have tried to raise money by selling their bonds, but buyers have been scarce. This has made it more costly for the lenders to shore up funds, thus threatening to raise interest rates and reduce the number of loans available.

Spellings said her department was monitoring the situation closely, working with the lending community and maintaining regular contact with schools.

"In our extensive outreach, no institutions have notified us that any eligible student has been denied access to federal loans," she said.

"We know that originations will peak, as they always do, in July and August before the school year starts. If origination trends shift, we will be prepared to act."

Recently, the Montana Higher Education Student Assistance Corp was unable to sell almost $400 million of bonds on the auction rate market and the Michigan Higher Education Student Loan Authority said it was temporarily suspending one of its loan programs due to insufficient capital.

Compounding problems is the fact that Congress last year cut federal subsidies paid to student lenders such as SLM Corp, otherwise known as Sallie Mae.

Since the subsidies were cut, some lenders have moved to refocus their business away from the federally guaranteed student loan market and into other areas.

But disruptions in the private lending market so far have not hindered students' ability to access federal loans.

Spellings said her department is reviewing options and pointed to provisions in the law that provide a way for the federal government to ensure that students can continue to access federal loans, which are generally cheaper than private college loans.

Lawmakers have urged the department to "take all available steps" to ensure that these provisions can become operational quickly if need be.

(Reporting by Rachelle Younglai; Editing by Dan Grebler)