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Spellings to College Presidents: Don’t Panic on Federal Student Loan Availability

Good job, Secretary Spellings, in assuring college presidents through this letter that the current credit crunch will not negatively impact the availability of federal student loans. According to the Secretary, “federal financial aid -- grants, loans through both the Federal Family Education Loan (FFEL) and Direct Loan Programs, and work-study -- will continue to be available to your students and their families. There are more than 2,000 lenders that originate loans in the FFEL Program. While a few lenders have chosen or may choose to reevaluate their continued participation in this program, we expect other lenders will actively compete for this loan volume and ensure that a competitive, efficient, and comprehensive FFEL Program continues to provide a variety of lending options, foster innovation, and improve customer service.”

The Education Department could've gone further noting the two key "fail safes" in the federal student loan system: the FFEL lender of last resort program and the option for colleges to switch easily into the Direct Loan program. But maybe the Secretary didn't want to highlight the safety and stability of the Direct Loan program, originally signed into law by this President. Still, the Education Department deserves credit.

Secretary Spellings' next step should be to reassure those who need to hear it the most: students and families. For weeks now, we have been voicing concern that a series of sensational news stories about the credit crunch’s effect on student loans are leaving families with a misleading impression about their ability to pay for college. Secretary Spelings should author an op-ed for publication in The New York Times, Washington Post, or Wall Street Journal -- the three leading newspapers that have covered the story – telling families that there will be no shortage of federal student loans, the type of college loans most students borrow. It's true that some students may find a lender they’ve used in the past is no longer available. And some borrowers may experience a delay as other banks or the federal government ramp up lending operations. But because of the way the federal programs are designed, there will be federal loans for every eligible student at every eligible college, university, or trade school. Families who need federal loans should not worry; they need not change their educational plans.

The students who will feel larger effects of the credit crunch are those with private loans. Approximately eight percent of undergraduate students use private loans, usually in addition to federal loans. Most of those students will see somewhat higher interest rates for their private loans than they are accustomed to; it appears private student loan interest rates are ticking up in the one-half to one percentage point range. Students with poor credit ratings, particularly those at trade schools whose graduates have poor repayment track records, might be unable to find a willing private student loan provider. All students, however, who apply for a private student loan with a creditworthy co-signer should be able to obtain a loan and obtain it at a lower interest rate than they otherwise would receive. Subprime private student loan borrowers who don't have a creditworthy co-signer and who are pursuing academic programs at schools with dubious job placement and loan repayment track records should consider lower cost education options.

An op-ed or public service announcement (on television, Madam Secretary, television) reassuring families and students is the appropriate next step. And more can be done to prepare for any impact the credit crunch might have on student loan borrowers. We intend to float some ideas in the days ahead.

For now, let's remember the purpose of federal financial aid is not to prop up or bail out lenders that have made risky debt financing decisions or even their employees who might be hurt by those risky management decisions. The purpose of federal financial aid is to help students.

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