FOR RELEASE
Contact: Stephanie Babyak (202) 401-1576
March 12, 1998
EDUCATION DEPARTMENT ACTS TO REFUTE LENDER "SCARE TACTICS"
U. S. Secretary of Education Richard W. Riley today expressed concern that some lenders are attempting to frighten students, schools, and Members of Congress into paying higher interest rates to preserve their current high profits on student loans. Some representatives of the banking industry have threatened to abandon the decades-old, federally guaranteed student loan program -- known as the Federal Family Education Loan (FFEL) program -- if the interest rate reduction Congress scheduled for July 1, 1998, takes effect. For example, a student who attends a 4-year public college and borrows $12,000 would save $650 in interest over a standard 10-year repayment period. Currently, 4.5 million students borrow money for postsecondary education under the FFEL program, for a total of $20 billion.
Riley vowed today that he will fight to see that access to student loans not be interrupted.
"In response to some lenders' scare tactics, the Education Department is taking steps to implement the broad authority granted by Congress to ensure continued access to FFEL loans," Riley said. AWe are committed to assuring that no student is denied the financial help they need to go to college."
As part of the effort to ensure uninterrupted access to college student loans, the U.S. Department of Education today began discussions with the Student Loan Marketing Association (Sallie Mae) and contacted all 36 guaranty agencies about their capacity to fulfill their statutory obligation to issue loans if necessary. They are required by law to serve as "lenders of last resort."
One of these guaranty agencies, the Pennsylvania Higher Education Assistance Agency, has already informed the department that it could be available right away to make at least one million student loans to assist students across the nation. This is triple the number it currently makes and about one-fifth of all FFEL loans made nationwide.
In 1993, Congress scheduled the reduction in the student loan interest rate, which would save students who borrow hundreds to thousands of dollars over the life of their loans. For example, a master's degree student who borrows an average of $20,000 would see a savings of $1,050 over 10 years of repayment, and a professional degree student who borrows $60,000 would save $3,200 in interest over 10 years.
"The Administration's proposal promotes fairness for students and shareholders -- a reasonable reduction in the interest rate to keep college affordable for students and families and a reasonable profit for banks," Riley said.
On Feb. 25, the Clinton Administration proposed a legislative change that would protect the lower interest rate and savings for students while assuring lenders a sufficient financial return, so they can continue to make loans to students and families. A recent U.S. Treasury Department analysis indicates that Congress can address lender concerns and still give students the benefit of the interest rate cut.
Sallie Mae, the largest student lender, was created by Congress. Guaranty agencies are state agencies and private, non-profit corporations designated and subsidized by the Education Department to administer the federal guarantee should the borrower default on a FFEL loan. Guaranty agencies use federal funds to reimburse banks when a borrower defaults, and the loan is then turned over to the guaranty agency for collection.
Riley said he believes that Sallie Mae and the guaranty agencies can ensure continued access to FFEL loans if necessary. Direct loans are an available option, as always, to schools that choose to make loans to students directly from the federal government instead of through private lenders.
"There is no reason for students and their parents to have anxiety over whether banks will still be issuing college loans: we are determined that no eligible student be denied aid. We will use every available provision of law to guarantee access to student loans," Riley said.
NOTE TO EDITORS: The March 12 correspondence to guaranty agencies is available upon request.
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