U.S. Treasury Helps Shore-up Student Loans

In addition to the huge federal bailout of failed financial institutions, the U.S. Treasury Department is taking steps to get money flowing in other critical lending sectors.  They've recently committed as much as $60 billion to the student loan market in an effort to reduce the illiquid assets on banks' balance sheets.

As the economy continues to sputter, all financial sectors are feeling the pinch, including education financing.  Student loans have become imperiled, as premiums on bonds have more than tripled in the past year, causing a mass exodus of investors from everything but the safest assets. 

As one solution to the problem, the Treasury Department plans to create a conduit to buy existing and new student loans from banks.  To support this endeavor, the conduit will then issue asset-backed commercial paper.

Ongoing effort to save student loans

During the economic crisis, the student financing market has been in turmoil.  Since May, the Education Department has been lending money to banks and buying up student loans.  This initiative has helped with some of the securities, but lenders have been unable to refinance the older loans. 

The Treasury's bold new step is an attempt to reassure investors that the securities that are backed by student loans will remain liquid.  Once this new conduit begins functioning smoothly, it's anticipated that the Education Department's efforts, which were originally planned to be temporary, will cease.

The Education Department's program was helpful, but rather limited.  It was only extended to lenders with cash on hand.  Under the new arrangement, when the conduit purchases old loans, many of the lenders who had been forced out of the action will be able to return.

"Bad bank" to the rescue

As the new conduit begins to unclog balance sheets, plans are underway in the Obama administration to expand the effort.  The Federal Deposit Insurance Corporation may begin running a "bad bank" that could buy up the toxic assets that are proving so detrimental to lending.  If a bank's balance sheet is cleared of these assets, student loans may begin flowing again.

Over the long haul, more conduits may be added to the process.  They would be allowed to sell asset-backed commercial paper on a daily basis.  Lenders could take part in the program, and fees would slowly be increased in time in an attempt to reduce the government's role.  A number of lenders are involved in the initiative, including Wells Fargo & Co., which helped in the initial development of the program.  The total number of participating lenders has not yet been determined.

Student loans are the backbone of our education financing system.  As our economy continues its decline, the need for a highly-skilled workforce has never been greater.  Ensuring viable student financing cannot be overlooked as a national priority.  The recent actions by the Treasury Department will hopefully provide the financial wherewithal for education financing to survive.  The fate of many students depends on it.