Bush administration outlines student loan program

By Kevin Drawbaugh

WASHINGTON (Reuters) - The Bush administration rolled out pricing details on Wednesday for an urgent student loan market stabilization program mandated earlier this month by Congress, with key lawmakers expressing general support.

Seeking to inject liquidity into the sluggish secondary market for student debt, the Education Department outlined a two-part plan to carry out a congressional order to buy up federally backed student loans at no net taxpayer cost.

To soak up unsecuritized debt, the department said it will buy 2008-2009 academic-year loans at par value, plus accrued interest, plus the origination fee paid by the lender, plus $75 per loan, minus the government subsidy paid to the lender.

To provide more short-term liquidity for student lenders, the department said it will also buy into temporary trusts that will be capitalized with federally guaranteed loans. The department said its trust interest will yield it a return equal to the commercial paper rate plus 50 basis points.

The department also reiterated it is completing plans to channel federal funds to 35 state-level guaranty agencies. Under a "lender-of-last resort" program, the agencies could use the money to provide loans to individual students or colleges.

Finally, the department said it had the capacity to double to $30 billion its direct loan volume.

Many U.S. college students borrow money to meet the high costs of university. Most loans come from banks and other lenders with federal backing. Some loans come straight from the Education Department, while banks also make private loans.

The program was developed after top lenders in the federally guaranteed loan program, including Sallie Mae, warned of a possible loan shortage in coming weeks due to fallout from the subprime mortgage crisis.  Continued...