The Wall Street Journal-20080216-Politics - Economics- Government Faces Pressures Over Student Loans

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Politics & Economics: Government Faces Pressures Over Student Loans

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With colleges preparing to set financial-aid packages for next fall, the Bush administration is under pressure to ensure that turmoil in the credit markets doesn't lead to a shortage of capital for student loans.

On Friday, U.S. Rep. Paul Kanjorski (D., Pa.), chairman of the House Financial Services Committee's subcommittee on capital markets, sent a letter to Treasury Secretary Henry Paulson and Education Secretary Margaret Spellings urging them to mount a federal effort to maintain liquidity and stability in the $77 billion student-loan market.

The letter asked them to work with the Federal Reserve and other agencies, saying the resulting plan should include an emergency system designed to get federal money directly to students if private lenders abandon the market. Rep. Kanjorski said he was "very concerned" about "long-term financing disruptions."

The letter comes after a week in which several auctions of securities tied to federal student loans failed, and a Michigan student-loan authority stopped making new loans under one program, saying it couldn't raise capital.

At a Senate Finance Committee hearing Thursday, Sen. Christopher Dodd (D., Conn.) questioned Mr. Paulson and Fed Chairman Ben Bernanke about what actions Congress and the administration should be taking.

Both men acknowledged the problems and said they were watching developments closely. A senior Senate aide said the committee is likely to revisit the issue in the coming weeks and press for an action plan. "I don't think we can wait until summer," he said.

Some observers argued that if smaller lenders dependent upon securities leave the market, big banks will take up the slack. "We are not reliant on the secondary market," said Thomas Kelly, spokesman for J.P. Morgan Chase & Co., adding that the bank intends to expand its $7 billion student-loan business.

With lending in a seasonal lull because most students have already secured their loans for the current academic year, Education Department officials say they have yet to see lending shortages developing at colleges and universities.

"Thus far, we have not encountered any situation in which an eligible school did not have access to federal student loans," said Larry Warder, acting chief operating officer of the department's federal-aid office.

Lending-industry executives say they would like the government to come up with a plan for pumping federal funds into the seized-up market for securities backed by student loans, possibly by buying up existing loans to free up capital.