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Student Debt as Fed Collateral

Help Sought From Fed For Falling Student Loan Bond Prices

The slump in the financial markets that has affected homeowners and Wall Street may now deter students and families from pursuing their higher education goals.

Continuing disruptions in the $330 billion auction-rate securities market is making it increasingly harder for lenders to raise money to finance college loans. With no investors to buy bonds backed by educational debt, many have been forced to exit the federally guaranteed student loan program or significantly scale back their participation.

To date, some 41 student loan lenders have left the guaranteed student loan program, and it's feared that more could follow their lead. For the first time since 1999, student loan bonds are losing value as investors flee the debt for fear that the economy is headed into a recession.

Sales of bonds reached record lows in 2008, dropping 65 percent compared with the first quarter of 2007.

And that has students and families worried. Already facing higher tuition costs, the exodus of student lenders will make it even more difficult for them to find funds to pay for college next fall.

Adding to lenders' troubles is the enactment of last year's College Cost and Reduction Act, which cut more than $22 billion in government subsidies to student lenders in the Federal Family Education Loan Program (FFELP). Nearly 86 percent of the loans originated under the FFELP are financed in the asset-backed market.

Federal Help

Earlier this week, the American Securitization Forum and the Securities Industry and Financial Markets Association lobbied the Federal Reserve for its help with the student loan credit crunch, asking it to accept bonds backed by student loans as collateral in its new lending facility. They also asked the Federal Reserve to use its emergency authority to provide loans to student lending agencies that would be secured by AAA-rated student-loan securities.

The Fed's lending facility, which was created last month, will infuse money into the financial markets by extending credit to primary dealers of U.S. government debt.

For years, education has been the backbone of the American Dream. Now that dream is in jeopardy. As turmoil in the financial markets continues, demand for bonds backed by student loans remains in limbo. Not only will this cause more student loan lenders to consider taking flight from the business of making student loans but they, along with countless other bond holders, are likely to sustain even more losses in the weeks and months ahead.

Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.


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