Archived - Clinton Administration's Plan for Ensured Access to Student Loans

Archived Information

Reauthorization of the Higher Education Act

The Clinton Administration's Plan for
Ensured Access to Student Loans

Summary

In the unlikely event that some private lenders participating in the guaranteed student loan program substantially reduce their activity after July 1, the Clinton Administration will use the tools that Congress has provided to ensure that all eligible students continue to have uninterrupted and timely access to student loans through the guaranteed loan program.

The Administration has requested the Student Loan Marketing Association (Sallie Mae) and each of the 36 guaranty agencies to meet their statutory obligation to act as "lenders of last resort" if eligible students cannot obtain loans through normal channels to attend eligible schools. According to their responses, Sallie Mae and the guaranty agencies could together provide many more loans than would be necessary under any scenario.

A lender-of-last-resort program would deal with any loan access problem within the government-guaranteed loan program in a cost-effective manner.

Capacity Exists to Ensure Loan Access

In March, the Department surveyed Sallie Mae and the 36 guaranty agencies to determine their ability to provide loans to students who are otherwise unable to get them. According to their responses, Sallie Mae and the guaranty agencies could together provide enough loans to ensure uninterrupted access to FFEL loans under any scenario.

Upon the request of the Secretary of Education, Sallie Mae is required under section 439(q) of the HEA to serve any eligible students who cannot otherwise obtain student loans. There is no specific provision for the advance of federal funds to Sallie Mae.

In addition, guaranty agencies are required by Section 428(j) of the HEA to act as lenders of last resort or to arrange for other entities to act as lenders of last resort on their behalf. Under sections 422(c)(7) and 428(j)(3) of the HEA, the Secretary has the authority to advance federal funds to guaranty agencies, on appropriate terms and conditions, to be used to make loans as a lender of last resort. A guaranty agency serving as a lender of last resort would be paid a fee established by the Secretary for making such loans in place of the traditional interest payments made to lenders.

Some guaranty agencies requested federal advances to fund the student loans, while others indicated that they did not need federal advances.

Sallie Mae's Participation

Founded by Congress as a "government-sponsored enterprise" to serve students, Sallie Mae has a legal obligation to make loans to all eligible students who cannot otherwise get them. In 1993, Congress imposed this responsibility in exchange for the many economic benefits that it had conferred on Sallie Mae. Under that law, if Sallie Mae fails to meet this legal obligation, the Secretary may -- among other remedies -- increase the 0.30 percent offset fee to 1.0 percent, potentially costing Sallie Mae hundreds of millions of dollars.

Long before lenders threatened to leave the FFEL program because of the scheduled July 1, 1998, interest rate change, Sallie Mae contractually committed itself to allocate $200 million for lender-of-last-resort loans. Sallie Mae now serves as a lender of last resort for students in Texas and Puerto Rico under this agreement.

This agreement did not limit Sallie Mae's legal responsibility. However, Sallie Mae has raised a number of objections and concerns about making a volume of loans greater than $200 million that will take some time to resolve.

The Department's primary responsibility is to ensure that students have continued timely access to government-guaranteed student loans. We have decided, at least for the present, to establish the necessary safety net by working primarily with the guaranty agencies.

However, in addition to requiring Sallie Mae to fulfill its existing $200 million commitment -- a critical component of the safety net -- the Department reserves the right to require Sallie Mae to increase its lender-of-last-resort lending should circumstances change.

Nationwide Network of "Backstop" Lenders

Three large guaranty agencies -- Pennsylvania Higher Education Assistance Agency (PHEAA), United Student Aid Funds, Inc. (USAF), and Great Lakes Higher Education Guaranty Corporation (Great Lakes) -- have informed us that, together, they have the capacity to make more student loans than we believe will be necessary under any likely scenario.

Consequently, the Department has asked PHEAA, USAF, and Great Lakes to be "backstop" lenders in addition to Sallie Mae. Together, these four organizations will ensure that students nationwide have uninterrupted access to student loans in the event that other guaranty agencies are unable to provide last-resort loans to students in their own states. The Department has assigned one or more of these organizations to each state to serve as the backstop lenders if the state's guaranty agency is unable to provide or arrange for a last-resort loan.

Obtaining Last-Resort Loans

Under the Administration's plan, a school that is unable to locate a lender willing to provide loans to its students must notify its state's designated guaranty agency and certify that its students have been unable to obtain loans. The guaranty agency will review the school's certification of need for last-resort loans, and then:

provide those loans itself, if necessary with federal advances,
provide them through an agreement with a third-party lender, if necessary with federal advances, or
ask the state's assigned backstop lender to provide them.

To allow schools to take advantage of preexisting relationships without unduly complicating this process, a school may locate its own source for last-resort loans by agreement with the guaranty agency for its state.

Fee Structure

Lenders of last resort will be compensated differently from lenders making regular FFEL loans:

The federal government would reimburse lenders for 100 percent of defaulted loan balances, while it pays for only 98 percent of default costs on regular FFEL loans;
Lenders who make last-resort loans with federal funds would be paid a fee set by the Secretary in lieu of special allowance payments and interest payments, and any interest paid by borrowers would be turned over to the Secretary of Education; and
Sallie Mae would not be required to pay the 0.30 percent offset fee on last-resort loans it makes.

This plan would deal with any student loan access problem in a cost-effective manner.

The Department's Accounting and Financial Management Service has begun designing and establishing the financial accounts and monitoring and reconciliation processes necessary to make federal advances to guaranty agencies for the purpose of last-resort loans. These systems will be fully implemented before July 1.

The Direct Loan Program

The Direct Loan program does not rely on private lenders and therefore does not have the potential loan access problem that exists in the FFEL program. However, we do not envision using Direct Loans to ensure loan access if lenders reduce their participation in the FFEL program.

The Administration is committed to maintaining access to student loans through the FFEL program. As always, the Direct Loan program will remain available to schools who choose to participate in it.

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Return to Secretary Riley's Letter to Congress (May 21, 1998)

The Clinton Administration's Plan for Ensured Access to Student Loans