Federal

House Backs Bill to Steady Student-Lending Market

By Alyson Klein — April 18, 2008 4 min read
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Includes updates and/or revisions.

The House of Representatives this week approved a bill aimed at making sure student loans remain available, despite a shaky credit market.

The measure, sponsored by Rep. George Miller, D-Calif., the chairman of the House Education and Labor Committee, would raise borrowing limits on some federally backed loans so that students wouldn’t have to turn to private lenders, some of whom have tightened their requirements for borrowers recently. And it would make sure a system of safeguards for the federal student-loan program would operate smoothly, in the event it was needed.

The House approved the bill by a vote of 383-27 on April 17.

As of this week, at least 60 private lenders had suspended participation in all or parts of federal student-loan programs, according to FinAid.org, a Web site offering financial-aid information. But many dropped programs allowing college graduates to consolidate their student loans, which has less of an impact on access to loans for college-going students.

About 24 percent of all student loans are issued by private lenders under their own terms and without government backing. Some of these lenders have recently become more stringent in their requirements, particularly for students with poor credit who attend high-cost institutions with low graduation rates.

College Credit

The House approved a bill last week aimed at making sure students are able to access loans for college, despite the credit crunch. The bill would:

• Raise limits on student loans not subsidized by the federal government, allowing dependent undergraduate students to borrow up to $31,000 over the course of their educations. Right now, such students can borrow up to $23,000.

• Permit parents to defer repayment of PLUS loans until up to six months after their children leave school.

• Temporarily classify delinquent mortgages as “extenuating circumstances” to help some parents qualify for PLUS loans.

SOURCE: House Education and Labor Committee

The House bill would help students borrow more money in federally backed loans so that they wouldn’t have to turn to private loans. Under current law, undergraduate students who are dependents of their parents may borrow $3,500 in unsubsidized federal loans during their first year of college, $4,500 during their second year, and up to $5,500 in subsequent years. And over the course of their undergraduate careers, students can borrow up to $23,000 in total federal loans.

Under the bill, students could borrow an additional $2,000 each year. Dependent undergraduates would be able to borrow up to $31,000 total, while independent undergraduates could take out as much as $57,500 over the course of their educations.

The measure would also make it easier for parents to repay PLUS loans, which are federally backed loans designed to help them cover their children’s college costs.

Direct-Lending Option

The measure would also clarify a stop-gap measure in current law that designates federally backed guarantee agencies as the “lenders of last resort,” which are charged with providing a safety net in case students have trouble getting federal loans. If those lenders of last resort have difficulty securing the necessary capital, the Department of Education can ask the Department of the Treasury to advance federal funds to the guarantee agencies so that they can make the loans.

The legislation would make certain that the funds could be advanced for all federally backed loans, not just subsidized ones on which the government pays interest. And the bill would also make it clear that the money for the advancement would be considered mandatory spending, meaning that Congress wouldn’t need to make a special appropriation.

Sen. Edward M. Kennedy, D-Mass., the chairman of the Senate Health, Education, Labor, and Pensions Committee, has introduced a similar bill that would also raise limits on federal loans for students by $1,000 per year, allowing dependent undergraduates to borrow up to $29,500. Sen. Kennedy’s legislation would also make an extra $750 in Pell Grant money available annually to students from some of the neediest families.

Sen. Kennedy this month sent a letter to David Ward, the president of the American Council on Education, a Washington-based association that represents about 1,800 colleges and universities, to encourage colleges to sign up for the federal direct-lending program. That program allows students to borrow from the U.S. Treasury.

The other main federal student-loan program, the Federal Family Education Loan program, subsidizes private lenders who are more likely to be vulnerable to problems in the credit market.

Right now, it’s unclear whether the credit crunch and the problems in the private loan market will have a serious impact on student access to higher education.

Brittny McCarthy, the director of federal relations for the American Association of State Colleges and Universities, said that so far, none of the 430 colleges in her organization has had trouble with getting loans for its students. And if that situation changes, Ms. McCarthy noted, the Education Department has said the direct-lending program was prepared to handle an influx in loan volume, even without federal legislation.

“We’re probably fine in terms of loan access without any additional legislation, but it’s reasonable to make sure and certain that the advances will be there if they’re needed,” said Robert M. Shireman, the executive director of the Project on Student Debt, a Berkeley, Calif.-based research and advocacy organization.

A version of this article appeared in the April 23, 2008 edition of Education Week as House Backs Bill to Steady Student-Lending Market

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