Bush administration outlines student loan program

By Kevin Drawbaugh

WASHINGTON (Reuters) - The Bush administration rolled out pricing details on Wednesday for an urgent student loan market stabilization program mandated earlier this month by Congress, with key lawmakers expressing general support.

Seeking to inject liquidity into the sluggish secondary market for student debt, the Education Department outlined a two-part plan to carry out a congressional order to buy up federally backed student loans at no net taxpayer cost.

To soak up unsecuritized debt, the department said it will buy 2008-2009 academic-year loans at par value, plus accrued interest, plus the origination fee paid by the lender, plus $75 per loan, minus the government subsidy paid to the lender.

To provide more short-term liquidity for student lenders, the department said it will also buy into temporary trusts that will be capitalized with federally guaranteed loans. The department said its trust interest will yield it a return equal to the commercial paper rate plus 50 basis points.

The department also reiterated it is completing plans to channel federal funds to 35 state-level guaranty agencies. Under a "lender-of-last resort" program, the agencies could use the money to provide loans to individual students or colleges.

Finally, the department said it had the capacity to double to $30 billion its direct loan volume.

Many U.S. college students borrow money to meet the high costs of university. Most loans come from banks and other lenders with federal backing. Some loans come straight from the Education Department, while banks also make private loans.

The program was developed after top lenders in the federally guaranteed loan program, including Sallie Mae, warned of a possible loan shortage in coming weeks due to fallout from the subprime mortgage crisis.

The federally-backed loan program in fiscal 2007 involved 2,000 lenders, $50 billion in loans and 6.8 million borrowers. In recent months, several dozen lenders accounting for less than 15 percent of loan volume have exited the program.

Many lenders have dropped out of the program because they say it is no longer profitable due to recent cuts in subsidies paid to them by the government. In addition, soft investor demand for securitized student loan debt has made it difficult for many lenders to raise capital for making new loans.

A spokeswoman for Sen. Edward Kennedy, chairman of the Senate education committee, said he commended Education Secretary Margaret Spellings for her quick implementation of Congress' stabilization program for the $85-billion market.

At the same time, Kennedy spokeswoman Melissa Wagoner said the Massachusetts Democrat ultimately wants "to remove banks and lenders from the equation" and make greater use of the Education Department's direct student loan program.

Kennedy, 76, was diagnosed on Tuesday with a malignant brain tumor. Released from the hospital on Wednesday and taken home, it was unclear when Kennedy would return to work.

House of Representatives education committee Chairman George Miller in a statement called Spellings' plan "a thoughtful approach" to implementing Congress' orders.

The California Democrat added: "To date, no student has been unable to get the federal loans for which they are eligible and we're confident that, as long as the department does its job, that will continue to be the case."

(Additional reporting by Glenn Somerville; Editing by Andre Grenon)