Shortage in federal student loans

PHOENIX, AZ--(Marketwire - May 22, 2008) - As President Bush signed legislation earlier this month that seeks to prevent more lenders from leaving the federal student loan program, critics wonder if the bill will be enough to forestall a shortage in federal student loans and ensure that students will have the money they need for college come fall.

"With this bill signed into law, students and families now have every assurance that they will continue to have access to all the federal student loans they are eligible for, no matter what happens in the nation´s financial markets," said Rep. George Miller, chairman of the House Education Committee.

Partly intended to stabilize the $85 billion student loan market, the Ensuring Continued Access to Student Loans Act passed in the wake of the more than 50 lenders that have suspended their federal student loan programs since October, when earlier legislation in the College Cost Reduction and Access Act cut more than $21 million in federal subsidies to private lenders issuing federal student loans.

The new act is going into effect just in time for the busy summer lending season, when some 6.8 million students will be looking for student loans for the fall semester. Faced by increasingly widespread rumblings in the public and media of a brewing shortfall of student loans, Congress rushed to push the bill through both houses less than a month after it was introduced.

In a student loan capital market hit hard by fallout from the subprime mortgage crisis, private lenders have been unable to sell their portfolios of bundled federal student loans to investors skittish about unstable markets and even moderate-risk securities. Unable to sell their student loan portfolios, these lenders have lacked the collateral they need to issue new student loans.

Under one provision of the new legislation, the Secretary of Education may opt to buy these unsold student loans from lenders, providing the liquidity the lenders need to fund new student loans.

The act also authorizes the Education Department to distribute student loan funds to guaranty agencies for the agencies to draw on as "lenders of last resort," in the event that a student or school is unable to obtain federal student loan money through other lenders.

In years past, before the decline of the housing and credit markets, many families would tap into the equity in their homes or turn to credit cards and private student loans to help finance their children´s education.

But in the current credit crunch where housing values have shrunk, home equity loans aren´t widely available, and lenders are tightening credit restrictions on every line of credit, from mortgages to credit cards to private student loans, it has become much more difficult for students and their families to find the money they need for college and graduate school.

In addition to the provisions it makes for lenders, the Ensuring Continued Access to Student Loans Act seeks to make it easier for students to get the funds they need for school by raising the borrowing limits on some federal student loans and increasing the maximum federal grant award for lower-income students.

The bill also makes allowances for parent borrowers who may be feeling the pinch of a weak economy and stringent credit requirements, compounded by soaring gas prices, higher food costs, and rising home payments on adjusting mortgages. Under the new legislation, parents with severely delinquent mortgages or medical payments may still be able to qualify for a credit-based federal PLUS parent loan. And rather than having to begin repayment on their federal PLUS loans in the 30-60 days following final disbursement, parent borrowers may defer their loan payments until up six months following their child´s graduation.

NextStudent, Federal Lender Code 834051, is dedicated to helping students and their families find affordable ways to pay for college. NextStudent offers one-on-one education finance counseling and has a portfolio of highly competitive education finance products and services, including a free online scholarship search engine, parent and student loans, private student loans, student loan consolidation programs, and college savings plans.

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