the $85 billion student loan market facing severe liquidity prob

Lawmakers urge action on student loan turmoil
Fri Feb 15, 2008 9:24pm EST
By Kevin Drawbaugh

WASHINGTON(Reuters) - Twenty-one members of the Congress on Friday wrote toregulators asking for urgent help to stabilize the secondary market forstudent loans.

In another instance of fallout from the crisis inthe mortgage market, the lawmakers appealed to Treasury Secretary HenryPaulson and Education Secretary Margaret Spellings to take swift actionin the $85 billion student loan market.

In a February 15 letterto the officials, the lawmakers said that lenders in the market forfederally guaranteed student loans "are now facing severe liquidityproblems."

Led by House of Representatives Capital MarketsSubcommittee Chairman Paul Kanjorski, the lawmakers said, "Financingeducation loans through the asset-backed securities market has becomeuneconomical in the current environment."

Kanjorski's concernabout the market was first reported by Reuters on Thursday after thePennsylvania Democrat mentioned it at a hearing he chaired on problemsamong bond insurers.

In recent days, several lenders haveexperienced failures in auction-rate securitizations, resulting indeals to sell loans into the secondary market being under-subscribed.

Thecongressmen said they are "very concerned that this problem could,unless quickly addressed, result in long-term financing disruptions forhigher education opportunities."

They asked Paulson andSpellings to work with the Federal Reserve and other agencies "toassist in ensuring liquidity and ... bringing stability to the studentloan financing market."

The letter comes at a turbulent time for higher education funding and the student loan industry.

PresidentGeorge W. Bush recently proposed a fiscal 2009 budget that would holdfederal student financial aid flat on a net basis. Congress last yearslashed federal subsidies paid to lenders including Sallie Mae and manyothers.

Since the subsidies were cut, some lenders have moved torefocus their business away from the federally guaranteed student loanmarket and into other areas, while a global credit crunch and sharpinterest rate cuts have jarred the markets.