The House Education Committee conducted a hearing Friday March 14 with two apparent objectives.  First, the lawmakers wanted a briefing from Secretary Spellings and two of her senior staff about what the U.S. Department of Education is and will be doing to avert a student loan shortage this fall, particularly by ramping up a never-used 'lender of last resort' authority. 

 

Jeff Wendt

Second, they queried two persons from the capital markets and two campus financial aid administrators on a variety of student loan-related topics. 

 

Here are some excerpts from the second portion. 

 

Only about 10 percent of all outstanding student loans are funded by bank deposits. Ninety percent are funded by U.S. capital markets.

Paul Wozniak

Managing Director, UBS Financial Services Inc.

 

The current liquidity shortage in the U.S.capital markets means there are no buyers for our securities. As a result, most lenders are receiving a negative return on their funds. Engaging the 'lender of last resort' mechanism will not solve the problem.

Chuck Sanders

Chief Operating Officer, South Carolina Student Loan Corporation

 

There are $80 billion worth of auction rate securities that student loan issuers want to refinance. There is another $70 billion worth of loans that need financing. So the capital markets liquidity problem has created a $150 billion choke point. Yes, I would call that a serious problem.

Paul Wozniak

Managing Director, UBS Financial Services Inc.

 

If a significant FFEL student loan shortage arises, as a 'lender of last resort,' we will not be able to arrange individual last resort loans from individual lenders for individual students. We will need significant advances of federal money to originate loans ourselves.

Terry Muilenberg

Senior VP, USA Funds

 

This academic year as a federal direct lender we made $97 million worth of loans to 14,645 students. We did it with two full-time staff, and we refer to the direct loan process as 'Pell with a promissory note.'

Roberta Johnson

Director of Financial Aid, Iowa State University

 

Our annual FFEL loan volume is about $100 million.  The switch from FFEL to direct lending is not an easy one. We estimate it would take a year to do it.

Sarah Bauder

Director, Student Financial Aid, University of Maryland

 

The municipal bond issuers didn't think about 'lender of last resort.' The mortgage bankers didn't think about 'lender of last resort.'  Nobody does until they're hit.  We need to make preparations now.

U.S. Congressman and committee chair (D-CA) 

 

Jeff Wendt is publisher of The Greentree Gazette. He can be reached at jwendt@greentreegazette.com.