Note on student loans

Bailout Bill, With Benefits for Student Lenders, Passes Congress

Washington — The U.S. House of Representatives today passed the $700-billion financial-system bailout bill that was approved on Wednesday by the Senate. The plan would let the federal government ease credit markets by purchasing bank assets, involving primarily mortgages but also other types of assets, including student loans.

Congress acted five months after it approved an earlier bailout bill that helped student-loan companies by allowing the Education Department to purchase assets derived from loans that the banks had issued as part of the government-subsidized student-loan program.

The $700-billion bailout package approved today, while aimed mainly at helping banks that hold many failed mortgages, also will let the government purchase a range of assets related to student loans.

The new legislation, which passed on debt collection with a vote of 263 to 171, raises the possibility that student-loan providers will be allowed to go beyond the terms established by May’s bailout and sell assets to the government that are based on older federal loans, as well as assets involving the private student loans that banks issue outside the government system of federal subsidies.

That authority was opposed last week by a coalition of 13 groups, including the American Association of State Colleges and Universities. The groups said that if private student loans were made eligible for government purchase in the mortgage-bailout plan, then Congress should provide student-loan borrowers with the same protections given to homeowners, including the right to discharge the debt through bankruptcy.

The bailout bill was supported, however, by President Bush and the American Council on Education, which wrote on Wednesday to Congress, arguing that the nation’s credit crisis was beginning to have adverse effects on many colleges and universities.

Mr. Bush and like-minded lawmakers repeatedly cited the possible effects on colleges as one of the justifications for passing the bailout bill. As a result of today’s vote, Mr. Bush said afterward, “More families will be able to get loans for cars and homes and college education.” —Paul Basken

Posted on Friday October 3, 2008 | Permalink |


The reason that the Department of Education was only supposed to purchase this year’s student loans was so that the banks would not bundle only older delinquent loans for sale. The rationale for the Department buying them back at all was to free up money to lend, not to eliminate all lender risk.