Fed move lifts student lenders

WASHINGTON (Reuters) - The student loan market got a boost from the Federal Reserve on Friday, with lender stocks rallying, amid signs of further possible help from Congress.

The Fed offered assistance to the sluggish market by announcing it would begin to accept student loan-backed securities as collateral for certain kinds of Fed borrowing.

The Fed decision "will help inject much-needed liquidity into the student loan market," said Connecticut Democratic Sen. Christopher Dodd, chairman of the Senate banking committee.

Sallie Mae, the largest U.S. student lender, closed up 8.9 percent to $21.75 on the New York Stock Exchange. Other stocks in the sector closed higher, including NelNet Inc, up 4.7 percent, and First Marblehead Corp, up 1.6 percent.

The rally was also fueled by Thursday's final congressional approval of a student loan stabilization program, expected to be signed into law by President George W. Bush, as well as a suggestion from Fed Chairman Ben Bernanke that Congress might want to revisit the loan provider subsidy system.

The $85-billion market is in trouble because investors, burned by the meltdown in mortgage-backed bonds, are shying away from buying student loan-backed securities, as well.

That has dried up capital flows for lenders that depend on the secondary market to raise money for making new loans, prompting fears of a loan shortage in coming months as millions of American students seek college financial aid.

The program just approved by Congress orders the U.S. Education Department to intervene in the market by buying up student loans and otherwise easing loan terms and extending more college grant money to students and their parents.

The National Governors Association praised Congress for its quick approval of the program and urged Education Secretary Margaret Spellings to implement the program promptly.

In a related matter, Dodd told Reuters in an interview that he has not given up on another possible approach -- getting the Federal Financing Bank (FFB), a Treasury Department unit, to pump some liquidity into the student loan market.

The Bush administration ruled out this approach earlier this month, saying the FFB lacked the legal authority for it.

But Dodd said he may pursue legislation that would specifically empower the FFB to take action in this area.

"We might have to ... I suspect that people at Treasury don't want to do it and so they're using this thin, phony reed of lacking legal authority," Dodd said.

Pennsylvania Democratic Rep. Paul Kanjorski, in the meantime, has already introduced a bill that he said "would make it absolutely clear that the administration can purchase federal student loans using the Federal Financing Bank."

As Congress explored the FFB issue, student financial aid activists were expressing concern about how Spellings will implement the loan purchasing program it will have to implement under the bill now headed to Bush for his signature.

The legislation orders the Education Department to set loan purchase prices in consultation with the Treasury Department and the Office of Management and Budget, said Senate aides.

It mandates that the prices impose no cost to the federal government. Aides said factors to be accounted for in setting the prices would include the loans' outstanding principal and unpaid accrued interest, plus origination costs.

Senate aides said prices could include a premium for lenders and still remain cost-neutral to the government.

They said the Education Department could contract to buy loans through forward commitments, rather than make actual purchases. In any case, only loans originated on or after October 1, 2003, could be purchased and the purchasing authority will expire in mid-2009 unless renewed, which would require congressional action, the aides said.

Kevin Bruns, spokesman for America's Student Loan Providers, an industry group, said: "The student loan community is very confident that Secretary Spellings will exercise her authority under the legislation prudently.

"Whether lenders will sell loans at par is a decision each lender has to make based on its own situation," he said.

(Additional reporting by Caroline Valetkevitch in New York, Editing by Phil Berlowitz)