U.S. Said to Give $60 Billion Backing for Student-Loan Plan

http://www.naicu.edu/news_room/us-said-to-give-60-billion-backing-for-student-loan-plan

Jan. 29 (Bloomberg) -- The U.S. Treasury agreed to commit as much as $60 billion to shore up the market for student loans and help reduce the illiquid assets clogging banks' balance sheets, according to three people familiar with the matter.

The department will use its Federal Financing Bank to provide a backstop for an initiative put together by Citigroup Inc. and Morgan Stanley, the people said. The so-called conduit will purchase existing and new student loans from banks, and issue asset-backed commercial paper to finance itself.

The program, which is outside of the $700 billion financial-rescue fund and doesn't need new congressional action, comes as officials and lawmakers seek to broaden the government's help beyond bailouts for Wall Street. Premiums on bonds backed by student loans more than tripled in the past year amid an exodus of investors from all but the safest assets.

"Schools and students who rely on these loans were at dire risk of basically seeing these lenders have to leave the market," said Charles Gabriel, managing director of Capital Alpha Partners, which advises investors on policy matters in Washington.

The conduit is expected to start within weeks. If it fails to find private funds in the commercial paper market, it will be able to tap the Federal Financing Bank for up to 90 days. After that, the Department of Education purchases the loans. The Treasury's backstop for the unit could cover the entire market of as much as $60 billion.

Fed Plan

The Federal Reserve separately plans to help the student- loan market with a $200 billion effort to spur consumer credit. That effort, called the Term Asset-Backed Securities Loan Facility, is scheduled to start next month.

Loans that are guaranteed by the Education Department's Federal Family Education Loan Program are eligible for the effort. The Treasury's Federal Financing Bank was created in 1973 to buy government-backed securities, and the Department of Education's role was authorized in legislation passed last year.

Banks, credit unions and non-profit lenders that offer student loans have been less able to package them into securities sold on to investors because of the financial crisis. With the conduit purchasing loans dating back to 2003, it may help pare the illiquid assets that are hampering new credit.

Once the conduit starts operating next month, it will replace temporary Department of Education programs put in place last year.

Wider Scope

The conduit will be an improvement over the temporary programs because those have only been available to lenders with cash on hand, said Justin Draeger, vice president of planning with the National Association of Student Financial Aid Administrators, which represents about 3,000 colleges and universities.

Because the conduit will buy old loans, "lenders who have been forced out of the market should be able to reenter it," Draeger said. He said the program provides "vital" assurances for the type of loans that make up the largest part of most students' financial-aid packages.

Bonds backed by payments on FFELP loans are trading at 3 percentage points more than the three-month London interbank offered rate, according to JPMorgan Chase & Co. data, up from 0.60 percentage point a year ago. Because the premiums are so high, it has been difficult for lenders to raise money for new loans, or to get existing loans off their books.

'Bad Bank'

Obama administration officials are separately preparing a broader effort to remove the toxic assets weighing down banks' balance sheets and hindering new lending. The Federal Deposit Insurance Corp. may run a so-called bad bank that would buy the illiquid investments, two people familiar with the situation said.

The administration has yet to formally comment on the student-loan initiative, which was spearheaded by Steven Shafran, an adviser to former Treasury Secretary Henry Paulson. Shafran was asked to stay on for a period under newly installed Treasury chief Timothy Geithner.

Treasury spokeswoman Jenni Engebretsen had no immediate comment.

Paulson said in a Jan. 16 statement that the Treasury's support would involve "no net cost to the taxpayer." The program will "help to unclog lender balance sheets," and help ensure that "federally guaranteed student loans are available to every qualified student," he said.

Five-Year Plan

The conduit could sell its asset-backed commercial paper as frequently as every day, with a typical maturity of 30 to 45 days. Lenders would pay a fee to join the initiative, which is set to last five years. The costs are designed to rise in later years, aiming to ease the government out of its backstop role.

Fitch Ratings gave debt to be issued by the unit, formally known as Straight-A Funding Student Loan Short-Term Notes, a preliminary rating of F1+, the highest grade.

"Citi and Morgan Stanley are working with a broad array of industry members to structure a conduit that addresses the objectives of all parties," Citibank said in November.

Sallie Mae and Wachovia Corp., which has been taken over by Wells Fargo & Co., also were involved in developing the program. The Department of Education regulations indicate there could eventually be more than one conduit. Any future entity would have to make its own arrangement with the Treasury.

be something in it for them.

This sounds similar to what was done with mortgage loans, I must be missing something.

:shrug:


"The U.S. Treasury agreed to commit as much as $60 billion to shore up the market for student loans and help reduce the illiquid assets clogging banks' balance sheets, according to three people familiar with the matter.

The department will use its Federal Financing Bank to provide a backstop for an initiative put together by Citigroup Inc. and Morgan Stanley, the people said. The so-called conduit will purchase existing and new student loans from banks, and issue asset-backed commercial paper to finance itself.

The program, which is outside of the $700 billion financial-rescue fund and doesn't need new congressional action, comes as officials and lawmakers seek to broaden the government's help beyond bailouts for Wall Street...


...Because the conduit will buy old loans, "lenders who have been forced out of the market should be able to reenter it," Draeger said. He said the program provides "vital" assurances for the type of loans that make up the largest part of most students' financial-aid packages..."

"Obama administration officials are separately preparing a broader effort to remove the toxic assets weighing down banks' balance sheets and hindering new lending. The Federal Deposit Insurance Corp. may run a so-called bad bank that would buy the illiquid investments, two people familiar with the situation said.

The administration has yet to formally comment on the student-loan initiative, which was spearheaded by Steven Shafran, an adviser to former Treasury Secretary Henry Paulson. Shafran was asked to stay on for a period under newly installed Treasury chief Timothy Geithner.

Treasury spokeswoman Jenni Engebretsen had no immediate comment.

Paulson said in a Jan. 16 statement that the Treasury's support would involve "no net cost to the taxpayer." The program will "help to unclog lender balance sheets," and help ensure that "federally guaranteed student loans are available to every qualified student," he said."

.......

My question is what about the person who has a loan now and is hit with big % rates when they have to go on hold from not having money to pay them? Lots of questions!

I believe him.

:sarcasm:

So who will buy these highly rated asset backed securities?

Agree lots of questions and this will fly under the radar.

the administration is making sure they cover the bases.

:woohoo::bounce::woohoo::bounce::woohoo::bounce::woohoo::bounce::woohoo::bounce:

We were informed the lender for my husband's private school loan to supplement his federal loan is bankrupt and will not be writing anymore loans. He has one more semester.