The Washington Post reports:
With scores of lenders unable to come up with money to provide student loans, the Department of Education is preparing to exercise broad new powers in the coming weeks that could fundamentally recast how millions of students pay for college.
This initiative could transform the federal government from a guarantor of student loans into the dominant provider, replacing the outside lenders to whom students and their families have long turned. Though the Education Department has been making a portion of these federally backed loans, it is now aiming to dramatically expand its role as a direct lender to fill the void created by an exodus of private-sector lenders, due primarily to the credit crisis.
Traditionally, there have been two primary sources of student loans guaranteed by the federal government. About a fifth have come from the Education Department itself. Outside lenders have represented a far larger share of the market. But now, as the mortgage crisis has crippled the broader credit markets, many firms are exiting the student loan business, saying it’s no longer profitable. The expanded role of the Education Department — both as a direct lender and a source of capital to other lenders — is just one of the fundamental changes sweeping through the student loan industry. According to FinAid, 88 lenders, including 25 of the largest firms, have announced they will no longer offer federally guaranteed loans, citing their difficulty in getting financing from the troubled credit markets.
Now, the department is being asked to issue far more loans this year than it ever has in the past. Last year, the department provided $14 billion in federally guaranteed loans directly to students. This summer, during the peak of the student-lending season, that share is expected to more than double and possibly reach $35 billion, or about half the market, according to FinAid and other analysts.
In addition, the department will likely have to take over the market that consolidates federally guaranteed loans for post-graduates. This is a $37 billion business that allows these borrowers to combine all of their student loans into one package with a single, relatively low rate. Already, lenders representing 77 percent of the consolidation market have dropped out since the start of the credit crisis. Department officials said they are prepared to hire contractors to handle this burden.
Edward M. Kennedy (D-Mass.), who chairs the Senate Health, Education, Labor and Pensions Committee, recently sent a letter to the presidents of all the nation’s universities, urging them to join the direct-lending program as soon as possible. He is concerned that a flood of requests to switch to the direct-loan program will come late in the summer and overwhelm the department, aides said. Since the beginning of March, nearly 300 universities and colleges have applied to make their students eligible for direct loans from the government.
Some leading Democrats in Congress have urged the government to take responsibility for providing all federally guaranteed loans. Sens. Hillary Rodham Clinton (D-N.Y.) and Barack Obama (D-Ill.) have both said that, as president, they would hand the entire market to the Department of Education.
At the same time that the department is expanding its direct loan program, its officials are also working with financial experts from several federal agencies, including the Treasury, the Council of Economic Advisers, and the Office of Management and Budget, to plan for purchasing loans from other lenders. Officials familiar with the plan, which is likely to involve money from the Treasury, said it may take weeks to release details.
Kennedy and Rep. George Miller (D-Calif.), who chairs the House Education and Labor Committee, are also preparing a letter that asks the Government Accountability Office to keep a close eye on how the measure is carried out because the department is required to buy student loans in a way that does not result in a loss for taxpayers.