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Public Statements

Credit Market and Student Loans

Floor Speech

Location: Washington, DC

CREDIT MARKET AND STUDENT LOANS -- (Senate - March 07, 2008)

Mr. KENNEDY. Mr. President, I wish to take a few moments to discuss a growing problem for students and families struggling to pay for college.

Americans are anxious about their economic futures. They are seeing volatile markets, disappearing jobs, home foreclosures, rising debt, and declining benefits. Now the crisis in the credit market, stemming from irresponsible lending practices in the mortgage industry, may impact their ability to secure student loans at fair rates so their children can go to the college of their choice.

We all know that student loans are critical for millions of students and parents trying to pay for college. In the last 20 years, as the cost of college has tripled, more and more students are relying on students loans to afford a college education.

In 1993, less than half of all graduates had to take out loans, but in 2004, nearly two-thirds had to take out loans to finance their education.

This chart shows how more students must take out loans to finance their education. In 1993, if you look at the students taking out loans, and then here in 2004, you can see that as the cost of college has risen and grant aid has not kept pace, more and more students have to turn to loans. This difference has made students borrowing in the private sector--in many instances at exorbitant rates. It is this area, in the private sector, that is at risk. The federal student loan system is not affected in the same way. I will say more about that in my remarks.

Last year, we passed legislation that increased grant aid and ensured that Federal loans were cheaper for students by cutting interest rates. We also ensured that no graduate would have to pay more than 15 percent of their income in monthly loan payments and that those who enter public service will have their loans forgiven. But these benefits will be meaningless if these students cannot access the loans they need to be able to afford the college of their choice.

In recent weeks, the credit market crisis has made it more difficult for student lenders to secure capital. This has increased the cost of lending, causing some lenders to pull out of the student loan market and causing those operating outside the Federal loan program to cut back on lending to high-risk borrowers.

Due to the attractiveness of the Federal guarantee in the federally subsidized program--so far--other lenders are stepping up to fill in the gaps in that program.

And the interest rates in that program are capped so students are protected from inflated interest payments.

But students who need to go beyond the Federal loan program will have a tougher time finding lenders, and their rates will go up in the fall. Schools are beginning to sound alarm bells and telling students to get their loans now because they may be less available in the fall.

We must take action to ensure that students have the resources they need to attend college. We must ensure that the backstops built into the Federal loan program, designed to protect students and parents from the kind of credit market disruptions we are seeing today, are ready to be implemented.

One of those backstops is the Direct Loan Program. It allows students and parents to borrow directly from the Federal Government without going through a bank. The Secretary of Education uses funds from the U.S. Treasury to make the loans. This program does not rely on capital from the private financial markets, so it is completely insulated from the disruptions the market is experiencing today.

Current law allows the Secretary to advance capital to designated Lenders-of-Last-Resort so they can step in if students are having trouble finding loans through other banks.

These programs are already in the law. And nearly 2,000 colleges are already either using or signed up to use the Direct Loan Program. Last week, I wrote to Secretary Spellings urging her to take any necessary action to ensure that schools that rely solely on private banks can easily access the Direct Loan Program and to ensure that procedures are in place to set up lenders of last resort.

Mr. President, I ask unanimous consent to have printed in the Record the letter to Secretary Spellings at the end of my remarks.

The ACTING PRESIDENT pro tempore. Without objection, it is so ordered.

(See exhibit 1.)

Mr. KENNEDY. Mr. President, we must also ensure that students who are borrowing outside the Federal loan program are protected. A good first step is to make sure parents and students are aware of their options. According to the Department of Education, many students who turn to private loans--high-cost loans that are not subsidized by the Federal Government--are not taking advantage of the grant aid and low-interest loans that they are eligible for under Federal programs. This is unacceptable. We need to make sure college financial aid advisers are giving students the information they need to maximize student aid and get the best deals on their loans.

We are currently in conference with the House on the Higher Education Act. That bill will ensure that we do just that. It will help students make the most of the college aid they are eligible for by requiring lenders to disclose--on private loan applications and the documents they sign before a loan is made--that students may be eligible for grants from the Federal Government, their State, and their college, as well as lower-cost loans from the federally subsidized program. We also require additional counseling by the financial aid experts for students regarding their student aid options.

For families who need additional loans beyond the Federal loans while they are in school, we must ensure they can access loans at affordable rates in the private markets. We are working with our colleagues in the Banking Committee, led by the committee's chair, Senator Dodd, on this issue. I also plan to offer legislation that will expand the eligibility for low-cost Government loans for these students.

In the coming weeks, the Committee I chair, which deals with education issues, will convene hearings so we can hear directly from those affected. We will also continue to monitor the Department of Education's efforts to implement the existing safeguards in the Federal programs.

In today's uncertain economy, Congress has an obligation to provide a steady hand and to shore up programs on which Americans depend. Nothing can be more important than ensuring that families can afford a college degree.

Exhibit 1

Washington, DC, February 28, 2008.

Secretary of Education, U.S. Department of Education, Washington, DC.

DEAR SECRETARY SPELLINGS: As you know, the U.S. capital market has been experiencing stress as a result of the sub-prime mortgage crisis and investor uncertainty about the condition of the economy. Recently, certain student loan lenders have encountered difficulties in accessing the capital market to finance their lending activity. While these disruptions have had an impact on some lenders, they so far have not negatively affected students' ability to access federal loans. Some lenders have expressed concern about their ability to continue to make loans through the Federal Family Education Loan Program (FFELP), but others are anticipating increasing their student loan business in response to changes in the FFEL marketplace. As you know, there are several tools already in statute that protect against any unforeseen disruptions in the private capital markets. We urge you to take any steps necessary to ensure that these options are readily available so that recent activity in the credit markets does not adversely affect students' ability to secure federal student loans in a timely manner.

Since the capital market disruptions began, we have been closely monitoring the situation and its potential impact on the Federal student loan programs. We and our staffs have held in-depth discussions, and will continue meeting with, the many stakeholders involved in delivering Federal college loans to students and families, including schools, lenders, guaranty agencies, secondary markets, investment bankers, and officials of various Federal agencies, including the Departments of Education and Treasury. Through these discussions we have gained a detailed understanding of how the current difficulties in the credit markets might affect some segments of the FFELP industry, especially those lenders that have relied on the auction rate securities market.

While we are hopeful that overall credit market conditions will soon improve, subsequently easing the constraints some in the FFELP industry currently face, it is only prudent to prepare now to ensure that these conditions do not negatively impact students' ability to access Federal student loans. As we have seen far too often, shocks in the credit and financial markets come as a surprise, leaving those affected little time to react.

Having plans in place and operational now will help ensure that all stakeholders, including institutions and the federal government, can respond to any potential loan access problems with the least possible delay for students, families, and schools. More importantly, such plans will provide students and families with the assurance that they will continue to be able to obtain Federal student loans to finance their education.

The Department of Education needs to be prepared to use the tools the Congress has provided to ensure that all eligible students continue to have uninterrupted and timely access to Federal student loans, in the unlikely event that stress in the credit market leads a significant number of lenders to substantially reduce their activity in FFELP.

First, the Department of Education should update plans to implement a lender-of-last resort program in the instance that there are widespread student loan access problems and take all available steps to ensure these plans can become operational quickly, if necessary. As you know, under existing law FFELP guaranty agencies are obligated to serve as lenders-of-last resort to avert any possible problem in access to student loans, thereby providing a nationwide network of backstop lenders. Further, you have the authority to advance federal funds to guaranty agencies to provide them with loan capital if needed. While such a program has not been previously implemented for the FFELP, the Department had established such a plan in 1998, when some FFELP lenders were then indicating that they might withdraw from the guaranteed loan program. Updating these plans now will help ensure that deploying such a contingency can he done at the first sign of any problems experienced by schools or borrowers in obtaining Federal student loans from a FFELP lender.

Second, the Department of Education should take action to ensure that the Direct Loan program is fully prepared to respond to any unanticipated increase in demand for the program. As you know, the Direct Loan program does not rely on private lenders and therefore will not be affected by the changes in the credit market. Based on our discussions with Department officials, financial aid officials from schools currently participating in the Direct Loan program, and others, we are confident that the program could help alleviate any potential problem that borrowers or schools may face should FFELP lenders continue to face difficulties and withdraw from the program. The Department needs to take steps to ensure its plans to facilitate and expedite a school's transition from the FFELP to the Direct Loan program on either a temporary or permanent basis can be immediately executed, should a school so desire. In addition, it is important for the Department to ensure that adequate capacity exists to absorb any increases in additional loan volume.

Finally, we understand that you will soon be corresponding with colleges about the state of the Federal student loan programs. We request that in such correspondence you make readily available information on the option of participating in the Direct Loan program and on lender of last resort procedures.

We are encouraged that the Department has begun to examine these options, but we look forward to hearing about further contingency plans that would allow the Department to act immediately to ensure all students and families continue to have access to federal student loans in a timely manner.

We stand ready to provide you with any needed assistance that you believe will be necessary in undertaking the two important steps outlined above.


Edward M. Kennedy,
Chairman, Senate Committee on Health, Education, Labor, and Pensions.

George Miller,
Chairman, House Committee on Education and Labor.

Mr. KENNEDY. Mr. President, I suggest the absence of a quorum.

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