The U.S. Department of Education announced it will buy $6.5 billion in federally guaranteed student loans from the 2007-08 academic year to ensure loans remain available to students in the future.
The current credit crisis has caused many banks and private lenders to pull out of the educational-loan industry, resulting in less private investment to financially-backed student loans.
I remain committed to making sure students and their families continue to have access to federal loans for this school year and beyond, said U.S. Education Secretary Margaret Spellings, in the announcement of the loan purchase on the departments Web site.
The department anticipates purchasing up to $500 million in loans each week until Feb. 28, 2009, according to its Web site. This is a short-term program to minimize disruptions in the federal loan program until another program, designed for a long-term market stability, is put into place.
The department announced the long-term program in early November.
In this case, the department would provide the underlying assets to the conduits to purchase the Federal Family Education Loan Program loans and provide long-term marketplace stability.
Finance professor Ehud Ronn said when educational loans are issued to students, they are generally securitized or packaged so stockholders can invest in them and receive the interest on the loans.
In the past few months, investors have been less willing to invest because of the unstable financial market.
If private investors arent willing to invest, the federal government has to buy them up, Ronn said. They cant sell to private investors, so theyve had to have the federal government step in so the loans wont dry up.
Ronn said the department is trying to free up the funds backing the 2007-08 loans, so students will be able to continue borrowing in the future.
In the 2007-08 academic year, 15,250 UT students borrowed $75 million in Stafford loans, said Henry Urick, assistant director of UT Student Financial Services. The Federal Family Education Loan Program includes the Stafford loan and the federal Parent Loan for Undergraduate Students. Urick said 3,500 UT parents borrowed $43 million from the parents loan.
Urick said he has not heard significant concerns from students or parents about federal loans drying up.
The credit crunch is a factor in the diminishment of private lender availability, he said. It has not significantly impacted the Stafford loan program at UT.
Ronn said the federal loan programs are not in immediate danger, but if the credit crisis lasts for a long time, the Department of Educations funds may not be able to continue to buy out the loans.
Eventually it may cause fewer student loans to be around, Ronn said. [The Department of Education] presumably doesnt have an uninhibited amount of money to do this. Its hard to know how long the crisis will last, and if it goes on, they will have to either ask Congress for more appropriations or diminish the number of federal student loans.