WASHINGTON (Reuters) - The credit-worthiness of securitized student loans is still good, but liquidity is scarce and Washington is moving to intervene in the market in a way that puts students and taxpayers first, Treasury Secretary Henry Paulson told Reuters on Thursday.
In a mild rebuke to some complaints in Congress that the Bush administration is rejecting an intervention plan favored by lenders, Paulson said: “Various financial institutions would love to have the government play an expansive role.”
But, he said in an interview: “The role we will play is the role that we think is in the best interest of the taxpayers and the students and it won’t be a role that is necessarily designed by the financial institutions.”
Sallie Mae, the largest U.S. student loan provider, has called for the Federal Financing Bank (FFB), a Treasury unit, to inject capital into the inactive secondary market for loans.
But Paulson dismissed this idea, reiterating an administration announcement on Wednesday, and backed a proposal focused on loan purchases by the Department of Education.
“This is something that I’ve looked at quite carefully — the FFB as an administrative solution, as opposed to a legislative solution ... It was really quite clear that they didn’t have the authority,” he said.
Turmoil in the $85-billion student loan market — brought on by a capital crunch stemming from the subprime mortgage crisis — is raising concerns about loan availability this summer as students lock in financing before going to college.
Dozens of lenders have left the federally guaranteed student loan program. Remaining lenders are having trouble selling securitized student loan debt on the secondary market — the main method many of them raise capital for new loans.
There are few signs so far of students being unable to get loans, academic leaders told a Senate hearing last week.
But the Bush administration on Wednesday endorsed a precautionary federal intervention to stabilize the market along the lines of legislation passed last week by the House of Representatives and under consideration in the Senate.
“Student loans have been securitized and even though there’s been no credit erosion there, the pendulum has swung hard to risk adversity. So a number of securitized products are now having liquidity problems,” Paulson said.
Other major student lenders include JPMorgan Chase & Co, Bank of America Corp and Citigroup.
Reporting by Kevin Drawbaugh, editing by Gerald E. McCormick