Lawmakers urge action on student loan turmoil

By Kevin Drawbaugh

WASHINGTON (Reuters) - Twenty-one members of the Congress on Friday wrote to regulators asking for urgent help to stabilize the secondary market for student loans.

In another instance of fallout from the crisis in the mortgage market, the lawmakers appealed to Treasury Secretary Henry Paulson and Education Secretary Margaret Spellings to take swift action in the $85 billion student loan market.

In a February 15 letter to the officials, the lawmakers said that lenders in the market for federally guaranteed student loans "are now facing severe liquidity problems."

Led by House of Representatives Capital Markets Subcommittee Chairman Paul Kanjorski, the lawmakers said, "Financing education loans through the asset-backed securities market has become uneconomical in the current environment."

Kanjorski's concern about the market was first reported by Reuters on Thursday after the Pennsylvania Democrat mentioned it at a hearing he chaired on problems among bond insurers.

In recent days, several lenders have experienced failures in auction-rate securitizations, resulting in deals to sell loans into the secondary market being under-subscribed.

The congressmen said they are "very concerned that this problem could, unless quickly addressed, result in long-term financing disruptions for higher education opportunities."

They asked Paulson and Spellings to work with the Federal Reserve and other agencies "to assist in ensuring liquidity and ... bringing stability to the student loan financing market."

The letter comes at a turbulent time for higher education funding and the student loan industry.

President George W. Bush recently proposed a fiscal 2009 budget that would hold federal student financial aid flat on a net basis. Congress last year slashed federal subsidies paid to lenders including Sallie Mae and many others.

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, while a global credit crunch and sharp interest rate cuts have jarred the markets.

(Reporting by Kevin Drawbaugh; Editing by Gary Hill)