[Senate Hearing 110-977]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-977


TURMOIL IN U.S. CREDIT MARKETS: IMPACT ON THE COST AND AVAILABILITY OF 
                             STUDENT LOANS

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                                   ON

 EXAMINING THE IMPACT OF THE CURRENT CREDIT MARKET TURMOIL ON THE COST 
                   AND AVAILABILITY OF STUDENT LOANS


                               __________

                        TUESDAY, APRIL 15, 2008

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs




      Available at: http: //www.access.gpo.gov /congress /senate /
                            senate05sh.html




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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware           CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey          JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
SHERROD BROWN, Ohio                  ELIZABETH DOLE, North Carolina
ROBERT P. CASEY, Pennsylvania        MEL MARTINEZ, Florida
JON TESTER, Montana                  BOB CORKER, Tennessee

                      Shawn Maher, Staff Director
        William D. Duhnke, Republican Staff Director and Counsel

               Roger M. Hollingsworth, Professional Staff
                       Aaron D. Klein, Economist
                       Lynsey Graham Rea, Counsel
                Didem Nisanci, Professional Staff Member
                   Mark Powden, Legislative Assistant
                 Chuck Jones, Professional Staff Member
                  Megan Bartley, Legislative Assistant
               David Stoopler, Professional Staff Member

                    Mark Osterle, Republican Counsel
                    Jim Johnson, Republican Counsel
          Courtney Geduldig, Republican Legislative Assistant
      Jennifer C. Gallagher, Republican Professional Staff Member

                       Dawn Ratliff, Chief Clerk
                      Shelvin Simmons, IT Director
                          Jim Crowell, Editor











                            C O N T E N T S

                              ----------                              

                        TUESDAY, APRIL 15, 2008

                                                                   Page

Opening statement of Chairman Dodd...............................     1

Opening statements, comments, or prepared statements of:
    Senator Shelby...............................................     4
    Senator Reed.................................................     5
    Senator Corker...............................................     6
    Senator Casey................................................     6
    Senator Martinez.............................................     6
    Senator Johnson
        Prepared statement.......................................    43
    Senator Dole
        Prepared statement.......................................    45

                               WITNESSES

John F. Remondi, Vice Chairman and Chief Financial Officer, 
  Sallie Mae, Inc................................................     8
    Prepared statement...........................................    47
    Response to written questions of:
        Senator Casey............................................   121
        Senator Enzi.............................................   122
Tom Deutsch, Deputy Executive Director, American Securitization 
  Forum..........................................................    10
    Prepared statement...........................................    55
    Response to written questions of:
        Senator Casey............................................   124
        Senator Tester...........................................   126
        Senator Enzi.............................................   126
Patricia McGuire, President, Trinity Washington University.......    11
    Prepared statement...........................................    61
Sarah Flanagan, Vice President for Policy Development, National 
  Association of Independent Colleges and Universities...........    14
    Prepared statement...........................................    73
    Response to written questions of:
        Senator Casey............................................   128
        Senator Tester...........................................   130
        Senator Enzi.............................................   130
Mark Kantrowitz, Publisher, FinAid.org...........................    16
    Prepared statement...........................................    93
    Response to written questions of:
        Senator Casey............................................   133
        Senator Tester...........................................   135
        Senator Enzi.............................................   136

              Additional Material Supplied for the Record

Prepared statement of Dr. Philip Day, President and CEO, National 
  Association of Student Financial Aid Administrators............   138

 
TURMOIL IN U.S. CREDIT MARKETS: IMPACT ON THE COST AND AVAILABILITY OF 
                             STUDENT LOANS

                              ----------                              


                        TUESDAY, APRIL 15, 2008

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The committee met at 10:06 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Christopher Dodd, chairman of the 
committee, presiding.

       OPENING STATEMENT OF CHAIRMAN CHRISTOPHER J. DODD

    Chairman Dodd. The committee will come to order. Let me 
begin by thanking all of our witnesses who are here this 
morning. We appreciate very much your attendance, and I have 
got a few opening comments to make. I will turn to Senator 
Shelby for any opening comments he wants to make. It is good to 
see we have some membership here and I will ask them if they 
have any brief comments they would like to make. We will keep 
the record open, obviously, for all statements that people want 
to include, including those by the witnesses, as well, 
additional supporting data or material you may want to offer to 
this committee for its consideration.
    This morning, the committee is going to examine the issue 
of student lending. Approximately 1 year ago in this very room, 
I asked a Governor of the Federal Reserve Board a very simple 
question. I said, would subprime mortgages, would the meltdown 
in that market spread to other sectors of our credit markets. 
The answer I received that morning was, no, it is not going to 
happen. Well, we on this committee were told that the crisis 
was contained. That exact word was used. Nothing more to worry 
about.
    Now we know that such a view was little more than wishful 
thinking. Predatory lending practices, which the Fed did 
little, if anything, to stop, I would add, poisoned the well of 
mortgage-backed securities, and as a result, investors are by 
and large declining to draw from that well and they are leery 
of drawing from other wells, as well, like the well for student 
loans. The result is a serious contraction in student loan 
credit that could result in a contraction of families' ability 
to finance the education of their children, or their children 
themselves to finance their own education.
    This is not the only area this has affected. This contagion 
effect now is spreading across our economy. This morning, we 
are going to talk about this one area, but it isn't limited to 
this area. It is affecting every other aspect of our economy.
    In recent months, over 50 lenders of federally guaranteed 
loans, including some of our nation's largest originators of 
Federal Stafford and PLUS student loans and nearly 20 
additional private student loan issuers have indicated that 
they intend to suspend their lending activities. State loan 
guarantee agencies in Pennsylvania, Michigan, Montana, and 
Texas have also effectively posted their own ``closed for 
business'' signs and indicated that they, too, plan to exit the 
student loan-making business.
    Combined, these lenders represent nearly 15 percent of the 
federally guaranteed loan market and make up about two-thirds 
of the loan consolidation business. A total of about $8 
billion--that is what that 15 percent represents--is now out, 
not going to be there in the coming weeks and months for 
students and their families to access to finance their higher 
education as lenders find themselves cutoff from access to 
traditional sources of funds in the debt markets.
    Some experts believe that this is just the start of an even 
larger exodus of lenders from the student loan market, and 
while I am unaware of an instance to date when a student has 
been unable to secure a loan, the withdrawal of these lenders, 
the ongoing turmoil in the U.S. credit markets, and the 
illiquidity in the student loan market have fueled concerns 
that a potential student loan credit crunch may be looming, one 
which could leave millions of students in a last-minute dash to 
secure financial assistance they need to attend college this 
academic year.
    In fact, the supply of student loans is dropping at a time 
when student loan applications are rising. We are told already 
there is a 20 percent increase in the application for student 
loans. Now, whether or not those numbers hold throughout the 
coming months or not, I can't say with absolute certainty, but 
if an early indication is any indication of where we are 
headed, if the applications are up, you take out $8 billion 
already from that market and you don't have to have a Ph.D. in 
mathematics to know the kind of problems we are facing in this 
area.
    A well-functioning and efficient post-secondary educational 
financing market is not only in the interest of young people, 
it is also in the interest of our nation, obviously. Ensuring 
that students have available and affordable access to a higher 
education should be among our highest priorities as a nation. 
Our world is growing more complex by the day, as we all know. 
Never before in the history of this country has a higher 
education been more crucial to the success of our nation than 
it is today.
    Sixty percent of the new jobs being created by our economy 
require at least some post-secondary education. Compare that to 
a half-century ago. In fact, you need not even go back that 
far, but a half-century ago, only 15 percent of the new jobs 
created in those days required some amount of higher education. 
If our children are to achieve, obviously, their highest 
aspirations and the aspirations parents have for their 
children, and if our nation's economic backbone is to continue 
to remain strong, then we must ensure that the doors of higher 
education remain open for all who have the desire and ability 
to walk through them.
    Yet at a time when higher education has never been more 
important, in a very real sense, it has never been more 
difficult for many families to afford it. Over the past two 
decades, the cost of attaining a college degree has risen 
approximately twice the rate of inflation. It is bad enough 
that it would increase at inflationary rates, but twice the 
rate of inflation. That is a staggering fact that has posed 
even a larger burden on lower- and middle-income families in 
our country.
    Today, of course, as many of you may know, the average cost 
of attending a public institution of higher learning is roughly 
$13,000 a year. The average cost of a private institution is 
more than double that, around $30,000 a year, while some 
schools are costing as much as $50,000. In fact, in this very 
city, I think if you looked at the institutions in Washington, 
D.C., in this community, I think the number is well in excess 
of $30,000 a year for most of the private institutions.
    For most students, educational loans, primarily federally 
guaranteed loans, and to a lesser degree private loans, bridge 
the gap between traditional funding sources, like scholarships, 
grants, and other forms of free financial aid, and skyrocketing 
tuition costs. According to the Department of Education, seven 
million borrowers will seek close to $70 billion in federally 
guaranteed loans this year. Millions more will seek up to $20 
billion in private educational loans to bridge that gap. The 
total is obviously between $90 and $100 billion. That is a 
staggering number and it demonstrates how reliant students have 
become on loans, like the low-cost FFELP loan program, to help 
meet their educational financing needs in the face of 
skyrocketing tuition costs.
    While in an ideal world, no student would ever have the 
need for an educational loan, we should ensure that so long as 
the need remains, we will do all that we can to ensure that 
educational loans are both available and affordable. So I look 
forward to today's hearing and listening to our witnesses 
regarding the current conditions in the student loan market and 
what, if any, steps can be taken to prevent today's concern 
from becoming tomorrow's full-blown crisis.
    So while we are not in a crisis, and I want to emphasize 
that this morning, that those words ought to be used very, very 
guardedly, this is not a crisis, but we are on the cusp between 
concern and crisis, and that is a fact. So this morning's 
hearing has value to highlight exactly where we are in this. It 
is not unlike where we were a year ago in talking about the 
residential mortgage concerns. Those concerns did explode into 
a crisis that we are in today because the words like 
``contained'' and the market was going to take care of this and 
all the other language we heard, it didn't solve the problem, 
or steps were not taken. So while we are gathering today to 
talk about a concern, I think we would be terribly misguided if 
we didn't appreciate where this could end up very quickly if we 
don't step up to the plate and take steps to reduce that 
possibility.
    To that end, I will be sending a letter to Secretary 
Paulson today asking him to consider using the Federal 
Financing Bank to help prime the pump of liquidity in order to 
help avert a funding crisis in the student loan market. I 
haven't had a chance to share this letter with Senator Shelby, 
which I will do, and obviously he will have to evaluate whether 
he wants to be on it with me, but hopefully he may join, and 
others, by the way, on the committee who may want to join us in 
that piece of correspondence, we would invite their taking a 
look at it to decide whether or not they want to be a part of 
it.
    We will also be writing to the Fed Chairman asking him to 
use all of the existing tools to avoid a breakdown in the 
market for student loans, including federally backed and AAA-
rated private student loans to be used as collateral at the 
Fed's temporary secured lending facility. And I invite my 
colleagues, as I said a minute ago, to enjoin in that effort.
    Last month, the Treasury and the Fed demonstrated their 
willingness and ability to take strong action to preserve 
liquidity and order in the capital markets. Their actions were 
unprecedented, as we all know, but so are the times in which we 
find ourselves today. It would be a mistake, in my view, for 
anyone to think that this crisis has passed. If the Fed and the 
Treasury can commit $30 billion of taxpayer money to enable the 
takeover of Bear Stearns by J.P. Morgan Chase, then certainly 
they can step in to enable working families to achieve the 
dream of a higher education for their children. If they do not, 
then I stand ready, as I am confident my colleagues would, to 
act legislatively to prevent a deepening of this crisis in this 
area.
    Last, I just want to mention, as we were talking earlier, 
in the--is it the Student Loan PLUS Program, is that correct? 
Something many of you may know here, the witnesses, but we have 
discovered there is a provision where if a family has been in 
foreclosure of their home in the last 5 years, then you are 
disqualified from that PLUS program. So when you want to know 
whether or not these issues, there is a cross-contamination, if 
you will, and if you are one of the 8,000 people today in this 
country who will file for foreclosure every day, if you have a 
14-year-old child today and you are filing for foreclosure, 
your family is then precluded under existing law from 
qualifying for that kind of student help 5 years from today.
    And so these problems are serious and they are growing, and 
it is not enough to sit around and just wring our hands, in my 
view. We need to be doing more in this regard.
    So with that, let me turn to Senator Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman. With the bulk of 
student loan origination occurring between May and early July, 
many students will be seeking loans to help pay for college. 
The turmoil in the credit markets has impacted almost every 
aspect of consumer lending, including student lending. In order 
to obtain a complete understanding of the problems in the 
student loan market, I believe we must examine both Federal and 
private lending.
    There are two main problem areas with Federal educational 
loans. First, non-depository institutions, such as Sallie Mae 
and Nelnet, are having difficulty obtaining funding because the 
auction rate securities market and the securitization process 
has slowed considerably.
    The second problem is that depository institutions are no 
longer allocating resources to student lending because it is 
not profitable. With liquidity problems rising and 
profitability diminishing, there are fewer resources available 
to fund student loans in this country. The situation in the 
private loan market is less complex because institutions are 
able to pass the cost of funds on to individual borrowers. That 
said, because credit has become tighter, underwriting has also 
become tighter. Borrowers at community college, for-profit 
institutions, and those who lack a co-borrower will be hardest 
hit in the private student loan market as loans become less 
available and more costly.
    What does all this mean for students? Some students will 
not be able to obtain loans, while other students will seek the 
efficiency of the private student lending market and will miss 
the opportunity to obtain Federal funding. Many other students 
will not be able to refinance and take advantage of the 
favorable interest rate environment we have today.
    Some have advocated that the Direct Loan Program should be 
used as a way to bridge the gap both for loan originations for 
the upcoming academic year as well as a way to help students 
consolidate their obligations. This program, however, has 
historically only achieved about 20 percent market share. 
Therefore, even assuming the Direct Loan Program could double 
their current market share, there is still a large gap that 
must be addressed.
    Many of our witnesses here today have put forth solutions. 
I am concerned that nearly all of the solutions require some 
degree of government intervention in the market. What will all 
of this really cost the taxpayer here? How will this affect 
innovation in the marketplace? At some point, I believe we must 
ask the institutions of higher learning to be part of the 
solution by stabilizing or even decreasing the cost of tuition 
where possible.
    Finally, Mr. Chairman, we must ensure that short-term 
solutions continue to work when the markets stabilize.
    I appreciate you holding this hearing today.
    Chairman Dodd. Thank you very much, Senator.
    Let me turn to my colleagues. Jack, do you have any opening 
quick comments you want to make, and if you have any quick 
comments, as well.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Mr. Chairman, thank you very much. Just very 
quickly, working on the Education Committee with you and many 
colleagues here, we tried to expand the access to student loans 
supported by the Federal Government, but still there is a huge 
demand for private loans. The number is staggering. Ten years 
ago, it was about $1.57 billion, and in 2006-2007, $17 billion 
in private loans, so it is a staggering amount of money and we 
have to make sure that these funds are available. That goes to 
the issue of the liquidity, the funding of these loans, the 
underwriting standards, the issue of how much counseling these 
individuals are getting.
    So this is a very valuable hearing and I appreciate the 
opportunity to participate. Thank you.
    Chairman Dodd. Thanks very much.
    Senator Corker, any quick comments at all?

                STATEMENT OF SENATOR BOB CORKER

    Senator Corker. Just that it is amazing how this option 
rate security issue is rippling through every segment of our 
society. I think this hearing is most timely. We have 
outstanding witnesses and I look forward to hearing from them.
    Chairman Dodd. Thanks very much.
    Bob, good morning.

              STATEMENT OF SENATOR ROBERT P. CASEY

    Senator Casey. Good morning, Mr. Chairman. Thank you very 
much. I will be very brief.
    But just to reiterate what a number of colleagues have 
said, this credit crisis and the foreclosure challenge that we 
have had is having ripple effects all across the country. Now 
we are dealing within the context of student loans. It is hard 
to comprehend that it could get to this point.
    But we are grateful for the hearing. We are looking forward 
to the testimony of the witnesses. We appreciate their presence 
here. Thank you.
    Chairman Dodd. Thank you. I mentioned, in fact, that in 
Pennsylvania, the student loan agency is one of the four or 
five States that has already indicated how serious the problem 
could be.
    Mel.

               STATEMENT OF SENATOR MEL MARTINEZ

    Senator Martinez. Mr. Chairman, thank you. This is a very 
timely hearing. I am the recipient of student loans and I would 
otherwise not have gotten through college if I hadn't had them 
available. I am very sympathetic and understand the problem.
    It also comes with a backdrop that as a Floridian, we are 
looking at significant shortfalls in education funding which 
could then lead to a rise in tuition for State universities, 
and so it is very timely. I appreciate you holding this hearing 
and I look forward to hearing from this excellent panel.
    Chairman Dodd. Thanks very much, and let me introduce our 
good panel. We thank them for being here.
    Jack Remondi is the Vice Chairman and the Chief Financial 
Officer of Sallie Mae and oversees all of the company's 
business strategy and is responsible for corporate finance, 
investor relations, accounting and reporting, financial 
planning, credit policy, risk management. He originally joined 
Sallie Mae in 1999 as a Senior Vice President and Treasurer as 
part of the acquisition of Nellie Mae, where he served as 
Executive Vice President of Finance from 2001 to 2005. He 
worked as a portfolio manager of PAR Capital Management, a 
Boston-based private investment management firm, before 
rejoining the company in January of 2008. Prior to Sallie Mae, 
Mr. Remondi served as the Chief Financial Officer and the 
Senior Vice President of Corporate Finance and Administration 
for Nellie Mae. Anyway, we thank you for being here.
    Tom Deutsch is the Deputy Executive Director of the 
American Securitization Forum. He handles coordination and 
implementation of the organization's securitization market 
advocacy initiatives. Previously, he served as an associate in 
the Capital Markets Department of Cadwalader, Wickersham and 
Taft, where he represented issuers and underwriters in various 
structured finance offerings, including residential mortgages, 
backed securitizations, and asset-backed securitizations. We 
thank you for being here.
    Patricia McGuire is the President of Trinity University. I 
should point out this is an institution that I have a 
particular fondness for and that has produced three of the most 
influential women in my life, I might add. My mother, my 
sister, and my sister's classmate, a young gal by the name of 
Nancy D'Alessandro went to Trinity College. Nancy D'Alessandro, 
of course, is the Speaker of the House today, Nancy Pelosi, and 
so I am delighted to have you here with us this morning.
    President McGuire has been the President of Trinity since 
1989. Before becoming President, she was the Associate Dean for 
Developmental and External Affairs at Georgetown University Law 
Center. She was also an adjunct professor of law. She earned 
her Bachelor of Arts degree cum laude from Trinity College and 
a law degree from Georgetown University, and thank you for 
being with us.
    Sarah Flanagan is the Vice President of the National 
Association of Independent Colleges and Universities. She is no 
stranger to the Senate, having worked for me a number of years 
ago. Welcome back to the Senate, Sarah. It is good to see you 
again. She was the Staff Director of the HELP Committee's 
Subcommittee on Children, Families, Drugs, and Alcoholism, and 
before that, she worked for Senator Claiborne Pell of Rhode 
Island. Sarah directs the comprehensive government relations 
effort in coordination with related State associations that 
focuses on issues of government regulation, student financial 
assistance, and tax policy. Before joining the Education 
Committee, Sarah Flanagan worked for Close-Up Foundation as an 
instructor, a teacher, trainer, and curriculum panelist. We are 
delighted to have you here with us this morning.
    Mark Kantrowitz is the Publisher of FinancialAid.org and 
Director of Advanced Projects for the FastWeb, a Monster 
company. He is ABD on a Ph.D. in computer science from Carnegie 
Mellon University, has Bachelor of Science degrees in 
mathematics and philosophy from MIT, and a Master of Science 
degree in computer science from CMU. He is also an alumnus of 
the Research Science Institute Program established by Admiral 
Hyman Rickover. He has previously been employed at Just 
Research, the MIT Artificial Intelligence Laboratory, the 
Center for Excellence in Education, and a variety of other 
positions. We are delighted to have you here with us, Mark, 
this morning.
    Senator Shelby. Mr. Chairman, we should have been sitting 
next to him in class.
    [Laughter.]
    Chairman Dodd. Or at least had access to what he was 
writing down on the test paper along the way.
    Senator Shelby. Right.
     [Laughter.]
    Chairman Dodd. I had all these acronyms here, I probably 
mispronounced half of them for you, but Mark, thank you for 
joining us.
    We will begin with you, Jack. What I will ask you to do, if 
you can, is try and keep your remarks to five, six, 7 minutes. 
I am not going to bang the gavel on you. Your full statements, 
any supporting data you think would be helpful for us to have a 
fuller appreciation of what you are going to share with us this 
morning, I promise you will be included in the record.

STATEMENT OF JOHN F. REMONDI, VICE CHAIRMAN AND CHIEF FINANCIAL 
                   OFFICER, SALLIE MAE, INC.

    Mr. Remondi. Good morning, Chairman Dodd, Ranking Member 
Shelby, and Members of the Committee. My name is Jack Remondi 
and I am Vice Chairman and Chief Financial Officer of Sallie 
Mae. Thank you for the opportunity to testify before you this 
morning.
    Over the last decade, the cost of college education has 
increased dramatically. Today, students and families rely more 
than ever on Federal student loans to meet this cost. Often, 
however, the amounts available under this program are not 
enough. Increasingly, credit-based or private student loans 
have helped families close this gap between State and Federal 
aid, scholarships, limited family resources, and the actual 
cost of attending college.
    This year, we expect the demand for education loans to be 
even higher, yet both Federal and non-Federal student loan 
markets are under severe stress. For the current academic 
season, we are facing a scenario where the demand for student 
loans will significantly outstrip the supply.
    I would like to describe Sallie Mae's recent experience in 
the student loan finance markets and to recommend action the 
Federal Government can take to restore liquidity for this 
primary source of paying for college.
    The financing of Federal student loans is relying on a 
well-functioning, well-priced credit market. This is clearly 
not the environment we operate in today. The compensation 
demanded by investors has increased rapidly and significantly 
since mid-summer of last year. Current funding levels have 
increased more than 14 times to LIBOR-plus-140 basis points, 
with these spreads doubling in the past 6 weeks alone. These 
are levels never seen before for this asset class. For non-
Federal loans, the situation is even worse.
    Because of the market disruption, there have been no term 
asset-backed securitizations for private student loans this 
year. This unprecedented cost of borrowing added to the 70 
basis point yield cuts contained in last year's College Cost 
Reduction and Access Act mean that every Federal loan 
originated today will be made at a loss, even before operating 
expenses.
    Because of these economics and limited access to funding, 
upwards of 50 lenders have already ceased or suspended making 
student loans. To put it simply, absent any liquidity and price 
relief, we are looking at a material shortfall in access to 
student loans this year.
    Given the seasonal nature of lending, students and schools 
are only beginning to feel the impact on loan availability. 
Demand is always low in the first quarter of the calendar year, 
but increases significantly as over 75 percent of all student 
loans are made in the next 6 months.
    It is our view that the gap between supply and demand is 
beginning to show. Although it is early, new loan applications 
to Sallie Mae are up 26 percent this month over last year, a 
pace that we have made clear, due to the access issues, that we 
cannot fund.
    Despite the significant loss incurred on each new Federal 
loan made, many lenders, including Sallie Mae, have continued 
to lend as they await a resolution addressing both access to 
liquidity and margin. If there is no action taken to address 
this impending crisis, all Federal loan lenders will be forced 
to ask, why are we continuing to make loans at a loss?
    We do, however, have a recommended solution where the 
Federal Government could take budget-neutral steps to avert a 
student loan crisis. Our view is that priority should be given 
to temporary steps that are non-disruptive to students and 
schools and are operationally viable to guarantee borrower 
access to loans this academic year.
    In our opinion, the least disruptive, most cost effective, 
most controllable, and quickest proposal to implement would be 
for the Department of Treasury's Federal Financing Bank to 
provide liquidity for federally guaranteed loans. The Federal 
Financing Bank is already authorized by statute to purchase and 
sell any obligation issued, sold, or guaranteed by a Federal 
agency. Therefore, legislative action is unnecessary to make 
this happen. Upon exercise of this authority to make funding 
available for new loans, the program would be up and running 
quickly.
    We believe this plan would ensure that student access to 
Federal loans is undisrupted. But such an action would do more 
than that. It would be a signal to the market that the 
government stands behind this vital program, and we believe 
would hasten a return of investors to this asset class.
    With front-page articles beginning to appear in the 
nation's newspapers detailing concerns about access to student 
loans, this plan would also help restore consumer confidence 
because parents and students would know that they could attend 
college as planned this fall.
    Most important for the subject of this hearing today, I 
believe that creating liquidity for Federal loans would have a 
spillover benefit to the non-Federal or private market, as 
well.
    There are other proposals under consideration, such as 
authorizing the Federal Home Loan Bank System to take Federal 
student loans as collateral for advances and allowing primary 
dealers and issuers to use student loan asset-backed securities 
as collateral to borrow from the Federal Reserve's newly 
created Term Securities Lending Facility. I look forward to 
discussing these, as well, in the course of this hearing.
    In conclusion, the financing environment for student loans 
is under unprecedented pressure due to the combination of 
legislative cuts and severe dislocation of the asset-backed and 
auction rate securities markets. Action is needed now to 
prevent a crisis of student access to Federal and private 
education loans. We do not have months or even weeks to decide 
the best course of action. The administration can and should 
move immediately to make available advances from the Federal 
Financing Bank. This action is needed to avert the impending 
crisis. We hope Congress can urge them to do so without delay.
    Thank you for allowing me to appear and I look forward to 
answering any questions you may have.
    Chairman Dodd. Thank you very much.
    Mr. Deutsch.

 STATEMENT OF TOM DEUTSCH, DEPUTY EXECUTIVE DIRECTOR, AMERICAN 
                      SECURITIZATION FORUM

    Mr. Deutsch. Good morning, Mr. Chairman and Ranking Member 
Shelby. Thank you very much for having us participate in this 
session. My name is Tom Deutsch and I am the Deputy Executive 
Director of the American Securitization Forum. I very much 
appreciate the opportunity to testify here today before this 
committee on behalf of the 375 member institutions of the 
American Securitization Forum and the 650 member institutions 
of the SIFMA. Our members include not only the firms who 
originate and securitize most of the student loans made in 
America, but also the institutional investors, such as pension 
funds and mutual funds, who purchase the securities backed by 
these student loans
    Over the last 40 years, four strong pillars have supported 
the success of the innovative FFELP program that is a critical 
public-partnership to provide education loans to America's 
youth. These four pillars include, one, a low-cost, efficient 
funding mechanism that capital markets have supplied to lenders 
of student loans through the capital markets and securitization 
process. Two, there have been appropriately sized incentives to 
lenders in the form of government principal and interest 
guarantees and special allowance payments. Three, it has been a 
robust market competition among student loan lenders that keep 
lender rates low and borrower benefits high. And four, there 
has been universal availability of FFELP loans to all potential 
students.
    Unfortunately, though, the incentive reductions during the 
peak of the credit cycle in 2007 have made origination of 
student loans uneconomical to a large portion of the student 
lending market in today's credit-constrained capital markets. 
The combined force of these events over the last 6 months now 
threatens the support of each pillar of the FFELP lending 
program and hence the overall structure of the program.
    Beyond FFELP lending, private student loans also help 
bridge the educational financing gap between Federal student 
loan limits and the ever-increasing costs of education in the 
United States. Much like the FFELP lending program, private 
student loan securitizations have also fallen on hard times 
these days. Over the past 6 months, turmoil in the debt capital 
markets, including significant repricing of credit risk, 
deleveraging of balance sheets, and failures in the auction 
rates securities market has eliminated economical access to the 
capital markets for many lenders.
    Three of the most basic indicators of this turmoil include: 
One, no student loan originated after September 30, 2007, has 
been funded through the capital markets. Two, for the first 
time in 40 years, no State agency or nonprofit has been able to 
access the capital markets in the first quarter of 2008. And 
three, originators of private student loans have not been able 
to access the traditional securitization markets since 
September of 2007.
    But for those lenders with access to capital market 
funding, they are finding significantly higher costs that they 
cannot recoup. Spreads on AAA-rated student loan ABS backed by 
FFELP loans have widened by nearly 150 basis points, or roughly 
15 times the level seen just last summer. Unlike most other 
forms of consumer credit, the interest rates charged to 
students on FFELP loans are set by law, so lenders are not able 
to recoup these additional costs on the FFELP loans that they 
originate.
    As a result, only $8.4 billion of student loan ABS was 
issued in the first quarter of 2008. That number compares to 
$21.7 billion issued in the first quarter of 2007. That is a 
very dramatic change year over year.
    Put simply, originating new FFELP student loans has largely 
become an unworkable business model for many of America's 
lenders. This unworkability has already demonstrated dramatic 
consequences recently. Approximately 50 lenders have already 
exited the FFELP program altogether or suspended lending, which 
represents nearly $8 billion, or 15 percent of 2007 
originations.
    But still looming over the next couple of months are the 
decisions to whether the other lenders will continue to 
originate under the FFELP program, and if so, what origination 
reductions they will be forced to implement if they do continue 
their participation in the program. Ultimately, the effect of 
last year's significant incentive reductions, plus the current 
high cost of credit in the capital markets, plus the inability 
to recoup these loans have sunk into a growing concern of 
severe disruption in the availability of students through the 
FFELP program.
    So today, we propose two potential short-term solutions 
that we believe appropriately balance Federal Government risk 
exposure and involvement with meeting the urgent need for 
additional sources of liquidity to help fund the student loan 
originations.
    First, the Federal Financing Bank at Department of the 
Treasury already has the statutory authority to provide 
additional liquidity to lenders to originate new FFELP loans.
    Second, the definition of program eligible collateral of 
the newly created Term Securities Lending Facility could be 
extended to include AAA-rated student loan ABS, which would 
allow these securities to be pledged as collateral to borrow 
from the new lending facility.
    Chairman Dodd, we applaud your correspondence to Secretary 
Paulson and to Chairman Bernanke on each of these subjects and 
encourage the Federal Government to act expeditiously to 
implement a targeted and near-term response that mirrors 
existing market practice and does not expose the American 
taxpayer to any additional credit risks. We believe these 
actions would help a much greater and potentially more costly 
Federal intervention later.
    I thank you, Mr. Chairman, for the opportunity to testify 
on this important and timely issue today and we look forward to 
working with the committee, the administration, and with 
regulators to ensure student loans are available to all 
eligible borrowers who seek financing for their educational 
expenses. Thank you.
    Chairman Dodd. Thank you very much, Mr. Deutsch.
    Ms. McGuire, thank you again for being with us.

           STATEMENT OF PATRICIA McGUIRE, PRESIDENT,
                 TRINITY WASHINGTON UNIVERSITY

    Ms. McGuire. Thank you so much, Senator Dodd. It is a 
tremendous honor to be here today on this important topic, and 
I am here, as well--I, too, am a financial aid baby and I would 
not be sitting here today but for the Federal loans that 
supported my education, also. So I personally appreciate this.
    Trinity, of course, is proud to be the alma mater of the 
great Dodd women, Grace and Martha, and such pioneering women 
as Senator--Speaker Pelosi--I just promoted her--Speaker Pelosi 
and former Connecticut Congresswoman Barbara Kennelly, as well, 
your former colleague in the delegation, and Kansas Governor 
Kathleen Sebelius. So we have a great track record here.
    Trinity has changed quite a bit since the days when those 
great women and I was a student at Trinity and I am really here 
today to put a face on this potential crisis for students of a 
different variety than most people think of when they think of 
private colleges today.
    Trinity and our students are at grave risk in this current 
crisis, make no doubt about it. Trinity's $10 million 
endowment--$10 million--marks us as one of those colleges 
founded by nuns whose devotion to mission led them to spend 
more time teaching than amassing wealth. One of the great 
ironies of contemporary higher education is that small, 
marginally resourced private institutions like Trinity now 
serve proportionately more low-income students than many public 
universities, particularly the flagship State universities.
    Trinity's median family income today is about $30,000, 
compared to median family income near $100,000 at the 
University of Maryland-College Park or the University of 
Virginia. Sixty-two percent of Trinity students today receive 
Pell Grants, a strong indicator of the critical economic 
challenges our students face. Nearly 90 percent of Trinity's 
students today are African-American and Latina, and more than 
95 percent are low-income students receiving large amounts of 
aid.
    Trinity enrolls more District of Columbia residents than 
any other private university in the nation. Indeed, about half 
of our students are D.C. residents. We have great success with 
these students. Sixty-five percent of the students from the 
District of Columbia over the last 5 years are either still 
enrolled or have graduated, and this is a tremendous record in 
a city where only 9 percent of today's ninth graders will 
likely graduate from college. Nearly 100 percent of our 
graduates are employed by the time of graduation due to our 
strong internships, including many here on the Hill. And many 
of our graduates go on to distinguished graduate schools, 
including recent acceptances to Columbia, Penn, Cornell, 
Georgetown, and UVA.
    Trinity's $18,250 tuition price tag is much lower than the 
area private universities that Senator Dodd mentioned earlier, 
and we provide nearly all of our full-time students with 
unfunded institutional grants averaging 40 percent of that 
tuition price tag. Unfunded means we don't have any cash 
backing up that discount.
    To pay the tuition balance after the large grant and their 
Pell Grants and other grants, our students depend heavily on 
Federal student loans and some private loans. Not many--many of 
our students can't get private loans, but they get the Federal 
student loans.
    Unlike students from wealthier families, my students have 
no fallback position. Yale, Harvard, Princeton, we have read 
about them, other immensely wealthy institutions. They can 
relieve middle-class families of any worries by removing loans 
entirely from their financial aid mix using the earnings of 
those massive endowments to subsidize students whose family 
incomes may be as high as $150,000 a year. My students, whose 
families would be delighted to earn $50,000 a year, cannot have 
the same financial privileges or comfort.
    Where will my students go if their loans disappear? What 
will Trinity do if our students cannot afford to pay their 
modest balances on their tuition bills? The credit crisis poses 
enormous risk for students and colleges both.
    Our students at Trinity clearly need the Federal loan 
program to help them cover the remaining tuition costs that 
Trinity and other grants cannot subsidize, as well as the 
additional costs of attendance beyond tuition, including 
support for housing, food, and books and transportation. Books 
today alone can cost $150 a pop for some of the courses.
    Our experience shows that we refund about 35 percent of the 
$13 million our students borrow back to the students, and the 
refunds make it possible for the students to pay for those 
books and their housing and food costs.
    To understand the significance of the federally guaranteed 
loan programs, in my testimony today, you will see a snapshot 
of our total financial aid volume in 2007-2008. This year, 
1,300 Trinity students received $13.6 million in Federal loans, 
and 80 students received another $800,000 in private loans. You 
will see a chart in my testimony to see how the loan volume is 
distributed across grade levels, on average. Of course, 
graduate students receive the largest loans because they have 
the highest thresholds.
    For the nearly 1,300 students receiving loans, any 
reduction in their ability to borrow could be catastrophic. 
Graduate students borrow up to $18,000 a year or more because 
they are not eligible for grants, so they use the loans to 
support their tuition price as well as living. Three-hundred-
and-seventy-two students enrolled in our first year received 
$5,555 in loan support with other aid sources. Trinity provides 
those same students an average Trinity grant of $6,500 on top 
of the $5,500 loan, and 78 percent of that first-year group 
also received Pell Grants averaging $3,400. Those first-year 
students in particular at age 17, 18, 19, and 20 could not 
possibly replace the $5,500 in loans from any other sources and 
Trinity cannot possibly give more than the 40 percent discount 
we are already giving on our tuition price.
    I should point out that with the very large loan volume 
that Trinity has, our default rate is just 3.2 percent. Our 
students are very serious about their collegiate educations and 
they well understand the obligation to pay back these loans, 
and that is a great tribute to them.
    While the vast majority of Trinity students participate in 
the FFELP program, a small number also receive private loans. 
We have 81 students, including 78 undergraduates, who received 
nearly a total of $800,000 in private loans. This group is the 
most seriously at-risk group if the private loan market 
collapses and we could not possibly backstop that loss.
    To put all these numbers in perspective, Trinity's $25 
million operating budget is 80 percent dependent on student 
tuition and fees. We are lucky to have many generous 
benefactors who also give us charitable gifts. That is about 10 
percent of our budget. Because student loans are the largest 
form of financial support our students receive, any weakness in 
their ability to secure loans will also impact Trinity's bottom 
line quite severely. Our $10 million endowment could not 
possibly backstop any erosion in student loans.
    Federal student loans are essential to fulfilling the 
promise of higher education for the students we serve at 
Trinity who are not so very different from millions of American 
college students except they do represent the new generations 
of new populations coming into American higher education in 
great number. The return these students make to this nation is 
incalculable. Trinity's great past is just a prophecy of the 
great future we will have and contribute to our nation. Any 
interruption of student loans will be a great loss not only for 
our students and our institutions, but for the Nation they will 
continue to lead in the future.
    Thank you so much, Senator Dodd, for your initiative on 
this very important topic.
    Chairman Dodd. That is wonderful testimony, Ms. McGuire. We 
thank you immensely for it.
    Ms. McGuire. Thank you, Senator Dodd.
    Chairman Dodd. Sarah, welcome back.

    STATEMENT OF SARAH FLANAGAN, VICE PRESIDENT FOR POLICY 
 DEVELOPMENT, NATIONAL ASSOCIATION OF INDEPENDENT COLLEGES AND 
                          UNIVERSITIES

    Ms. Flanagan. Thank you. Mr. Chairman and members of the 
Banking Committee, thank you for holding this important hearing 
today. NAICU represents 953 of America's private colleges, from 
the Ivy League, to women's colleges, to Historically Black 
Colleges, to a myriad of faith-based institutions that 
represent the full diversity of our nation's people, history, 
and collective intellectual traditions.
    I am proud to share this panel today with Pat McGuire, not 
only because I so admire her and her institution, but because 
Trinity is the perfect example of the type of school we 
represent.
    When they first hear the term ``private college,'' 
Americans often think of the Ivy League schools, schools that, 
by the way, give great student aid packages. However, Trinity 
is much more typical of our nation's 1,600 private colleges in 
wealth, purpose, and in size, and your 40 percent figure struck 
me because that is the national average for private colleges 
after grants. The average tuition support is 40 percent in 
private colleges.
    Also defying conventional wisdom, many families find that 
when their aid offer arrives from private colleges, the actual 
price they will pay is comparable to the cost of a public 
college. This is because of the huge amount of grant aid our 
colleges provide from their own funds.
    Still, not all colleges can make up the difference in cost 
for everyone. Some students are unable to cover all expenses 
through the Federal Student Loan Programs, since these programs 
have strict borrowing caps. The net effect has been a 
burgeoning private student loan market. For the most part, 
students at NAICU colleges are relying on these loans as a last 
resort, a limited and imperfect but essential access tool for 
some students.
    Between March 3 through 14 of this year, we decided to 
survey our members to determine how the turbulence in the 
auction rate securities market was affecting student loans. A 
copy of our survey and details of our findings are attached to 
my testimony. In general, some lenders are leaving the program 
and schools are in a regular scramble to find replacements. But 
we were relieved to find that schools are still able to secure 
new lenders. Colleges and the students we serve are not in 
crisis.
    Both Federal and private loans have seen a reduction in 
borrower benefits. In private-label loans, we are seeing the 
imposition of new credit requirements, requirements that may 
have been nonexistent just last year. Tightening credit 
requirements is not all bad, particularly if an institution's 
default rate on Federal loans gives evidence that students may 
not be able to handle the additional debt. But losing 
supplemental loans funding for all students at all colleges 
could pose an insurmountable barrier for many. One of the 
findings that both surprised and concerned us was that 60 
percent of the colleges that use private loans indicated they 
were essential to their institution's overall financial health.
    Since we closed this survey, storm clouds have continued to 
gather. One State did a follow-up survey with its members to 
see if students could meet the new private loan credit 
requirements. The news was not good, leading several colleges 
to be fearful of their own financial stability and nearly every 
college expecting to lose some students if alternatives cannot 
be found.
    This month begins a critical time in student lending. High 
school seniors only have between now and May 1, when deposits 
are due, to make their final choice of the college they will 
attend. As we sit here today, families across the Nation are 
sitting down comparing options and making these tough choices, 
factoring in the types and amounts of student loans they have 
been offered by the various schools. From May until late 
August, the loan process will be in high gear. Many of our 
institutions are anxious that the financing markets might 
worsen in the middle of this peak processing season.
    Adding to colleges' worries are problems many of them are 
facing in refinancing their own institutional bond debt or the 
increased cost of that debt, and I want to emphasize that. 
Colleges' bond debts are also in this market that has--and they 
also are having failed markets on their own debt. We have done 
a small survey on that and we are getting reports of 
institutions where just the increased cost on that bond debt is 
a couple of hundred thousand dollars a month.
    Wisely used, student loans are good loans, and not just 
because of the return on such an investment that we realize as 
a nation. Student loans are also a good financial investment 
for lenders. This is nothing short of amazing, and in fact, it 
is counterintuitive. Traditional students come to college with 
little or no credit history. Those that need to borrow the most 
are the poorest. In purely economic terms, this sounds like 
another high-risk portfolio. However, the numbers show the 
opposite true. Private colleges and universities have a default 
rate in the Federal Student Loan Programs of 2.4 percent. That 
is a proud record for a program in which the collateral is 
simply an improved mind, not a car or a boat or a home that can 
be reclaimed and resold.
    We realize the huge challenges this committee faces as you 
work to protect our economy from a crisis in the housing 
market. However, we also ask you to remember the nation's home 
of our minds, the enterprises that drive our knowledge-based 
economy, our colleges and the students they serve.
    We were asked to bring ideas to you today on how to avoid a 
student loan problem. At the risk of sounding naive amidst a 
panel of financing experts, I offer one simple inexpensive and 
quick step this committee might take. Please encourage 
Education Secretary Spellings and Treasury Secretary Paulson to 
make a joint statement to the American people that they will 
stand by America's students and the loan programs. That type of 
assurance in and of itself could send an important signal to 
investors that this is safe paper and ones they should invest 
in. Ultimately, this is not about the lenders. This is about 
the students. Let us give them a simple assurance that their 
educations matter to us all.
    Chairman Dodd. Very, very good, Sarah. Thank you very much. 
We appreciate it.
    Mark.

      STATEMENT OF MARK KANTROWITZ, PUBLISHER, FINAID.ORG

    Mr. Kantrowitz. Thank you, Chairman Dodd, Ranking Member 
Shelby, and the distinguished members of the Senate Committee 
on Banking, Housing, and Urban Affairs for convening this 
hearing and for the opportunity to appear before you. I am Mark 
Kantrowitz, Publisher of FinAid.org and Director of Advanced 
Projects for FastWeb.com. FinAid is the most popular website 
for student financial aid information, advice, and tools. 
FastWeb is the largest free scholarship matching service.
    Contagion from the subprime mortgage credit crisis has 
infected the education loan marketplace. There have been no 
successful bond issues for State loan agencies and no 
securitizations of private student loans since last fall. While 
there have been some securitizations of Federal guaranteed 
student loans, the volume is down by more than 57 percent year 
over year, and the cost of funds has increased by 137 basis 
points, on average. None of these securitizations have involved 
federally guaranteed student loans originated since October 1 
of 2007. The auction rate securitization market is dead. These 
problems are occurring despite the AAA rating of the student 
loan securities.
    The lack of liquidity has led to an unprecedented exodus of 
education lenders from Federal and private student loans. As of 
today, 57 education lenders have suspended their participation 
in federally guaranteed student loans and 19 lenders have 
suspended their private student loan programs.
    In fiscal year 2006, these lenders originated more than 
$6.5 billion in Stafford and PLUS loans to more than 800,000 
borrowers and more than $48.5 billion in consolidation loans to 
more than 1.6 million borrowers. That represents 13 percent of 
Stafford and PLUS loan volume and 67 percent, two-thirds of 
consolidation loan volume. These lenders include 21 of the top 
100 originators of Federal Stafford and PLUS loans and 27 of 
the top 100 originators of Federal consolidation loans. The top 
100 lenders originate 91.5 percent of Stafford and PLUS loans 
and 99.8 percent of consolidation loans.
    Last week, Sallie Mae, the largest education lender, 
announced it will no longer make consolidation loans. The 
Education Resources Institute, otherwise known as TERI, the 
largest nonprofit guarantor of private student loans, filed for 
Chapter 11 bankruptcy. Nelnet sold $1.2 billion worth of 
student loans for an after-tax loss of $28 million. There have 
been more than 2,500 layoffs industry-wide.
    The credit crisis has also had a direct impact on borrower 
eligibility for Federal and private student loans. Borrowers 
with a foreclosure, as you noted, in the last 5 years are 
ineligible for the Federal PLUS loan. I believe there will be 
about a 10-percent increase in PLUS loan denials at the start 
of the 2008-2009 student loan season, maybe more.
    Lenders are also tightening credit underwriting criteria 
for private student loans. Credit score requirements are 
increasing from a FICO score of 620 to at least a 650--anything 
under a 650 is considered subprime--and approval rates have 
dropped by 10 percent to 25 percent. Overall, more than 100,000 
additional families will be ineligible for both the Federal 
PLUS loan and for private student loans.
    The cost of Federal and private student loans has also 
increased. Most lenders have cut their Stafford and PLUS loan 
discounts in half and have eliminated discounts on 
consolidation loans. More than a dozen private student loan 
lenders have increased the interest rates by an average of 
seven-eights of a percent on their student loans, more on 
borrowers with bad or marginal credit than on those with good 
credit.
    These are signs of a very serious threat to our nation's 
education financing system and cause for concern. Without 
loans, some students may be forced to drop out of college.
    Existing solutions are inadequate. Neither the Direct Loan 
Program nor the lender of last resort program has been tested 
under the extreme conditions we face today. For example, the 
Federal Direct Consolidation Loan Program's volume will be more 
than four times last year's volume and more than twice the 
previous peak volume. Neither program addresses the liquidity 
problems that are forcing education lenders to exit the 
marketplace. Both are reactive solutions that offer the 
potential for a significant disruption during any transition or 
implementation period.
    It is better to implement proactive solutions that prevent 
a crisis. The most effective solutions will involve injecting 
liquidity into the student loan system. Three possible 
approaches include allowing the Federal Home Loan Bank and the 
Federal Financing Bank to invest in highly rated student loan 
securities, allowing lenders to pledge highly rated student 
loan securities as collateral for the Federal Term Securities 
Lending Facility, and conducting a reverse student loan auction 
in which lenders would compete for U.S. Treasury investment in 
highly rated student loan securities. The third approach would 
set margins competitively and is of limited duration, 
minimizing the need to wean lenders off of a source of cheap 
capital.
    Other proposed solutions are aimed at restoring investor 
confidence. These include stand-by loan purchase agreements, 
government insurance of bonds and securitizations against 
lender default, and eliminating the index rate mismatch. With 
regard to the latter, currently, Federal education lenders 
receive income that is indexed to the 3-month commercial paper 
rate while their cost of funds is indexed to the LIBOR index. 
Eliminating this index rate mismatch by changing from the 
commercial paper rate to a revenue-neutral margin relative to 
the LIBOR index would yield more predictable spreads and would 
simplify the structure of student loan asset-backed 
securitizations by avoiding the need for interest rate swaps. 
These solutions would reassure investors by reducing some of 
the risks associated with investing in these instruments.
    Chairman Dodd and Ranking Member Shelby, I once again thank 
you and the committee for taking an interest in ensuring the 
continued availability of education loans and for inviting me 
to share my thoughts on the matter. I would be happy to answer 
any questions you may have.
    Chairman Dodd. Well, thank you very, very much, Mark. That 
is very worthwhile testimony. I want to commend all of you for 
very thoughtful testimony this morning and some very good 
suggestions.
    Sarah Flanagan said something in her testimony that I 
presume to all of you may have jumped off the page at you. It 
certainly did to me, and one that I would like to rest of you 
to comment on as you look at it. Again, the backdrop of which 
you are all familiar with, obviously the credit crunch and 
liquidity crisis affecting capital markets is obviously 
spreading. We are all aware of that knowledge of it and what it 
could mean in terms of the possibility of, one, students not 
getting loans. That is one concern, obviously. Then if they get 
loans and these numbers begin to change, then whether or not 
they can stay in school, obviously a significant problem and 
not an insignificant one even today under normal, relatively 
normal circumstances.
    But Sarah said the following. She said, nearly every 
college expects to lose some students--I presume in addition to 
the ones you are already losing--if something isn't done to 
ensure supplemental loan funding for students with the greatest 
financial need, and I would like to know from the other members 
here whether or not you agree with her, that unless conditions 
significantly change or there is action by the government, that 
some students may not have the financing they need to attend 
college as a result of the ongoing crisis in our capital 
markets. And short of no access to credit, how many students 
will be negatively impacted through increased costs of 
borrowing.
    If you could respond to that, I would be very interested. 
Why don't we begin with you, Jack?
    Mr. Remondi. Sure. Thank you, Senator. Clearly, from our 
perspective, we know that a student who graduates is the best 
student that we could have from a credit quality perspective. 
We have heard some mentions of FICO scores here this morning, 
but FICO scores are perhaps an early indication of someone's 
creditworthiness, but when you are lending to a college 
student, it is all about graduation rates. It is an investment 
in their education and by obtaining that degree, they get 
access to better-paying jobs and higher levels of employment, 
or lower levels of unemployment.
    So from our perspective, we do everything possible to make 
sure that once we fund a student in the private credit market, 
that we are working to make sure that they have access to loans 
to complete their degree. If we don't allow them to do that or 
we deny that subsequent loan, we are only creating a future 
problem for ourselves.
    Chairman Dodd. Yes.
    Mr. Remondi. Now, the problem, of course, though, is we can 
only lend to the extent of what we can borrow ourselves in the 
capital markets and the situation as it is presenting itself 
today is one where our access to funding is severely limited. 
You have heard from the testimony this morning that there are 
no private credit loans. No private credit loan asset-backed 
transactions have been completed this year. The last one was 
last fall, in 2007. We at Sallie Mae do have other sources of 
funding that we had issued in prior years that we can make 
available to private credit lending and we plan to do so. That 
access or availability of those funds, however, is dependent on 
our ability to be able to refinance the Federal student loans 
that are presently being financed by those sources of funding.
    Chairman Dodd. Yes.
    Mr. Remondi. And so if we have access to things like the 
Federal Financing Bank or the access to the Federal student 
loan term asset-backed market opens up, it does free up private 
credit capacity for us.
    Chairman Dodd. I am going to come back, because you and 
Mark are both advocating that the Federal Financing Bank inject 
liquidity into the market, so I want to come back in a minute 
after you have answered this question and ask the other 
panelists to comment on that suggestion, as well. I think it is 
a very intriguing one and one that I am very much interested 
in. It is a little different. Congressman Kanjorski, for whom I 
have a lot of respect on the House side and has spent a lot of 
time on these issues and very knowledgeable about them, has a 
different approach on this and I would like you to sort of 
educate the committee, if you would a bit, on those two 
different ideas and why you think the one that both of you are 
suggesting is the better way to go.
    But in the meantime, let us come back to the question I 
asked about Sarah Flanagan's comments.
    Mr. Deutsch. Well, at least from the ASF perspective, I 
think our view is that if you have a significant withdrawal of 
lenders being able to lend, if there is a significant amount of 
capital, even we have already seen 15 percent of originations 
from 2007 which are off of the market, and I think you will see 
significant additions to that over the next month to 2 months, 
if you take that much capital out of the system and students 
don't have access to that capital, the ultimate question is are 
they going to be able to afford their education.
    And I think as Mr. Remondi indicated, it may fall on the 
incoming freshmen, I think is the most affected class, because 
lenders obviously have an incentive for those that they have 
lended to already to keep those students in college. But I 
think for those new students going to college, I think from all 
the discussion, I think those are the ones that are going to be 
most affected this fall.
    Chairman Dodd. Let me interrupt your own question that I 
have asked you because one of you said, and I forget which one 
of you said this--this may have been you, Sarah--that this 
problem could occur, really could peak at the worst possible 
time. We are now in April and obviously this process is 
beginning. By holding a hearing on the subject matter in April, 
people are saying, why aren't you doing it in September? Well, 
because this is the process when people really begin to apply 
for this.
    But you could have the problem really peak this summer at 
some point, and I know there are those who are advocating--and 
I am an advocate. The old idea of direct loans is something--I 
think is something that institutions ought to have the right to 
consider and want to use. Others are a little more aggressive 
about the Direct Loan Program. But I am told that the process 
of direct loans, even if they are up and going, is somewhere 
between four and 6 weeks--I want you to correct me if I am 
wrong on these numbers--and so even if that is a potential 
option later in the year, it might not work out given the time 
constraints when students begin school and to get that 
financial assistance. If I am off on anything I have said 
there, I would like you to comment on this.
    Tom, do you know? Do you have any comment on that?
    Mr. Deutsch. I think I might defer to the colleagues from 
the school, but I would emphasize, I think the urgency of this 
from a lender's perspective, I think what you have seen so far 
over the last month to 2 months with a number of lenders 
announcing right now that they are not able----
    Chairman Dodd. Do you expect those numbers to grow, by the 
way?
    Mr. Deutsch. I expect those to grow substantially.
    Chairman Dodd. Fifteen percent to what? Any idea beyond the 
15 percent?
    Mr. Deutsch. I think it would be speculation for me to make 
any kind of percentage targets, but I think it will grow--it 
will continue to grow substantially.
    Chairman Dodd. Mark, do you have an idea?
    Mr. Kantrowitz [Off microphone]. Well, if there is no 
government intervention--I think there would be only 15 to 25 
left because most of the lenders who are out there depend on 
the top 100. Ninety-one-point-five percent of Stafford PLUS 
originations came from the top 100 educational lenders, so 
beyond the top 100, it doesn't really matter. And the 
difference between the 13 percent figure that I have been 
giving and the 16 percent figure that Jack Remondi mentioned is 
the school's lender schools. Most of them have been informed 
that their lender partners will no longer be funding their 
loans and that is likely to disappear. They are still having 
admitted that they are not being able to make the loans, but 
they won't be able to.
    Chairman Dodd. I have listened to everything you just said. 
Give me a number here that gives me a----
    Mr. Kantrowitz. It is 15 to 25 lenders from 2,700. I 
haven't totaled how much it is, but probably about half of all 
loan volume is at risk of significant disruption.
    Chairman Dodd. Half of all----
    Mr. Kantrowitz. Federal and private loan volume.
    Chairman Dodd. So the $90 billion, we are looking 
potentially at something that would put $45 to $50 billion at 
risk?
    Mr. Kantrowitz. Yes.
    Chairman Dodd. I want to go back to the other question.
    Ms. McGuire. Will we lose students?
    Chairman Dodd. Yes.
    Ms. McGuire. Absolutely. And in fact, the kind of students 
we have at Trinity are exactly the kind of students who are 
more likely to have to stop college. When we look at our 
attrition rates every semester, the single greatest reason why 
students have to stop out from their college education is 
financial for the low-income students we serve. If there is any 
interruption of their ability to borrow at the way they are 
borrowing right now, it could be devastating.
    I do want to comment on this is, in fact, the moment of the 
largest surge of students going to college that we have seen 
since the baby boom, and at Trinity, not to put too fine a 
point on it, as one of the historic Catholic women's colleges, 
for years, we suffered a great enrollment decline. Now we are 
about to welcome the largest freshman class we have seen since 
about 1967 and we see hundreds and hundreds of young women, but 
they are very different young women from the past. These are, 
as I mentioned earlier, predominately low-income women of color 
from the city.
    There has been a tremendous push in the District of 
Columbia to get our local residents into college, and when I 
see--just last weekend, we had Prospective Students Day--
literally hundreds of students so eager to come from our local 
public high schools to Trinity, where we do a great job with 
them, and then I think that come June, July, August, when they 
are trying to put their packages together, that there might be 
some retrenchment on the credit available to them, on the loans 
available to make this dream a reality. It really makes me kind 
of sick, actually, to think about that. It is potentially a 
terrible crisis.
    I look at the loan volume that our students in the upper-
class years. I know the lenders are saying they will mostly 
focus on keeping students in school who are already there, and 
yet those students, too, are so marginal. Ultimately, the 
greatest impact of this crisis will be on the lowest-income 
students who need this support the most.
    I hear lenders talking about maybe looking at students who 
are at risk of dropping out or that sort of thing. I think we 
really need to be very careful about ensuring that whatever 
tactics are used to address this problem, that it does not 
leave out the students who need this kind of support the most.
    Chairman Dodd. Yes. Sarah, you made the comment, so I know 
your views on this. I want to quickly, because I have gone over 
my time already, I want to come back to the very idea and 
suggestion that both Mr. Remondi and Mr. Kantrowitz are 
proposing, and that is using the Federal Financing Bank to 
inject liquidity into the market. Specifically, I want to know 
whether the FFB can and should do direct purchasing, in which 
case the bank cannot inject more than $15 billion in liquidity 
under existing regulations, I guess, or statutes, or whether 
the FFB should lend to the Treasury Department or some other 
Federal agency to allow that agency to use those funds to 
inject liquidity into the market. And then, of course, there 
has been a different suggestion by Congressman Kanjorski.
    Do you have any comments on this, any of you, the three in 
the middle?
    Mr. Remondi. Sure. We believe the Federal Financing Bank 
does provide the simplest and fastest solution to this problem, 
because it doesn't require legislation and its authority to 
invest in government-guaranteed assets already exists. We also 
think it is critical to the process that the loans that need to 
be originated this upcoming academic year need to be processed 
through the infrastructure that exists today. Because we are at 
April 15 and the peak lending season begins in the next several 
weeks, there is really no opportunity to redirect that volume 
to other sources. And 80 percent of loans that get originated 
this academic year do get originated through the Federal 
Student Loan Program--through the private sector version of the 
Federal Student Loan Program.
    Other options that are on the table, like the Federal Home 
Loan Banks, are something that we would also support. The 
problem, it is all of these things together. Probably no one 
solution is the single solution for the entirety of the issue. 
It is more a combination of solutions to address the problem, 
and the Federal Home Loan Bank advances would be helpful to 
that.
    Chairman Dodd. Yes.
    Mr. Remondi. One thing to note, however, is about 80 
percent of the loans made under the Federal loan programs are 
made by non-depository institutions, so we are institutions 
that do not have access to the Federal Reserve and do not have 
access to the Federal Home Loan Bank, so we would be dependent 
upon others to assist in that process, which is why we 
recommend the Federal Financing Bank as the best solution.
    Chairman Dodd. Mark, do you want to add to this in any way?
    Mr. Kantrowitz. I think they covered it very well. I would 
like----
    Chairman Dodd. Is that microphone working?
    Mr. Kantrowitz. I point out that there has already been one 
school closure that is attributed to the student loan credit 
crisis. Silver State Helicopters of Nevada blames the credit 
crisis for its failure, and that school is closed, leaving a 
lot of students who had borrowed from private student loans 
with no education and high debt.
    Chairman Dodd. Thank you. Any comments, Sarah and Ms. 
McGuire on this?
    [No response.]
    Chairman Dodd. OK, thank you. Senator Shelby.
    Senator Shelby. Mr. Deutsch, it appears that investors are 
lumping all structured debt products together, including 
guaranteed student loans, and are generally avoiding these 
products. Is that true?
    Mr. Deutsch. I wouldn't necessarily say that they are 
lumping them all together. I think what----
    Senator Shelby. What are they doing?
    Mr. Deutsch. What is happened is that investors--the supply 
of capital in total has shrunk, so it is not necessarily that, 
say, for example, FFELP student loans, that they ascribe any 
higher credit risk to them than other credit products. It is 
that there is simply much less supply of capital out of the 
market and obviously a lot of demand by the different issuers, 
whether it is student loans, credit cards, mortgages, 
automobiles.
    Senator Shelby. Do you securitize the student loans like 
you do a lot of other things?
    Mr. Deutsch. It is a very--it is the exact same process 
as----
    Senator Shelby. What is the credit risk here? We know there 
is great credit risk in subprime. We know the track record 
there.
    Mr. Deutsch. Sure.
    Senator Shelby. A lot of people should have known it ahead 
of time, but I haven't heard of a lot of securities that have 
been bought, structured, and so forth defaulting. Can you get 
into that?
    Mr. Deutsch. Sure. I think in the student loan asset-backed 
base, there is, especially in the FFELP-backed, asset-backed 
securities, very little----
    Senator Shelby. What do you mean by that, for the record?
    Mr. Deutsch. A FFELP--if you originate a FFELP student 
loan, it comes with a principal and interest guarantee from the 
government of, say, 97 percent. So if that student would 
default on that underlying student loan, the Federal Government 
would step in.
    Senator Shelby. You have got a guarantee there.
    Mr. Deutsch. Exactly. So when you package those into a 
securitization, the underlying credit risk of that collateral, 
those student loans effectively is very minimal. So it is 
surprising that when you look at the student loan asset-backed 
securities market that the spreads have widened quite 
significantly. And again, I would go back to the point that it 
is not investors ascribing a higher credit risk to that 
underlying collateral, but just simply their ability to demand 
higher spreads because there is so much demand for capital out 
in the market right now but so little supply from investors 
generally.
    Senator Shelby. But there is a lot of cash in the market 
everywhere, you read. This is just spread from the subprime and 
other markets and people are nervous about investing, is that 
it?
    Mr. Deutsch. I believe there is a significant concern about 
credit and extending credit in America right now across any 
type of asset.
    Senator Shelby. And notwithstanding these are quality 
securities?
    Mr. Deutsch. But the student loan asset-backed securities 
are AAA rating. Very few, if any, have ever been downgraded.
    Senator Shelby. Mr. Remondi, how do you access credit, just 
for the record? You are the Chief Financial Officer at Sallie 
Mae and you go to the market. You have to have money. Just 
briefly explain how you do that.
    Mr. Remondi. We rely principally on the securitization 
market. So we bundle loans into securities and then sell 
principally in the term asset-backed market. We have never 
relied on any significant degree in the auction rate securities 
market.
    If I may expand on my colleague's comments, the investors 
at this stage in the game are fearful for lots of reasons. 
Certainly, there has been a tightening of the supply of capital 
to invest and some of that is not that cash is less available, 
it is just not available for term investments. So everyone is 
being very cautious and conservative.
    But in addition----
    Senator Shelby. What is money costing you right now, 
roughly?
    Mr. Remondi. Well, right now, our last transaction which we 
priced last Friday, so this is very new, was LIBOR-plus-143 
basis points, and that is up from LIBOR-plus----
    Senator Shelby. LIBOR is adjusted every 3 months, or what?
    Mr. Remondi. LIBOR is adjusted----
    Senator Shelby. It is a 3-month rate.
    Mr. Remondi. Correct. That is correct. And we look at it as 
a spread differential because our underlying assets are 
variable rate, as well. So the assets and liabilities move with 
interest rates in general----
    Senator Shelby. What would that be above Treasury?
    Mr. Remondi. Above Treasury, that would be about 260 basis 
points.
    Senator Shelby. OK. So you are paying more.
    Mr. Remondi. We are definitely----
    Senator Shelby. People get a better return and very few 
defaults, right?
    Mr. Remondi. That is right. Investors are not concerned 
about the quality, the credit quality. They are concerned about 
the market price risk in the asset itself.
    Senator Shelby. Ms. Flanagan and President McGuire, 
efficiency in Federal lending. Ms. Flanagan, in your testimony, 
you stated that current legislative efforts to address 
potential liquidity problems include providing modest increases 
in the Federal Student Loan Program. If there are no lenders to 
supply the loans to schools, then students may be forced to go 
out to the private student lending market and skip subsidized 
Federal loans altogether.
    Do you believe that the Federal Family Education Loans 
provided by private lenders have helped achieve efficiency both 
for institutions of higher education as well as borrowers?
    Ms. Flanagan. Absolutely. It is a wonderful program. It has 
got a tremendous history. When the Federal Government really 
got into the program and set it up in 1965, it did so because 
everybody's image was that who would lend to a 17-year-old.
    Senator Shelby. OK. If that is so, which you say it is, 
doesn't it make sense, or does it make sense to take steps to 
ensure that these lenders are available to administer this 
program if they are efficient?
    Ms. Flanagan. Yes.
    Senator Shelby. Do you agree with that, President McGuire?
    Ms. McGuire. Yes, absolutely.
    Senator Shelby. Efficiency is very important in the market, 
isn't it?
    Ms. McGuire. I totally agree with that, yes.
    Senator Shelby. OK. Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much, Senator Shelby.
    Before I turn to Senator Reed, let me, because I want to 
pick up on the point Senator Shelby made. I think it is a very 
important point and one that, Jack, you emphasized, as well. 
Fed Governor Kevin Warsh shares the very point I think that 
Senator Shelby was making and that you made, Jack, as well. I 
just wanted to quote him here. He spoke yesterday at a speech 
in New York.
    He said, ``Credit quality concerns alone do not appear even 
now sufficiently widespread to induce the depth of problems 
witnessed in financial markets during the past several months. 
Some auction rate securities that failed, for example, funded 
pools of federally guaranteed student loans.'' And so the 
quality is really not the issue.
    And again, I come back to the point, and I don't know if 
you agree with it, but the epicenter of all of this is this 
foreclosure issue. That is where the center of all of this is 
spreading out. And the headline this morning, I think, in one 
of the leading newspapers is all about consumers and stores 
failing because of the spread of this problem into what is 
occurring. So I just make that point. I think it is a very 
valid point and sometimes gets lost in all of this.
    Senator Reed.
    Senator Reed. Thank you, Mr. Chairman. I thought the line 
of questioning by Senator Shelby was directly on target. I 
think what both Mr. Remondi and Mr. Deutsch said is that there 
has been a dramatic replacing of credit risk but no significant 
change in credit risk, and it is a result of extraneous issues, 
the overall situation in the market. It raises a couple of 
questions or a couple of comments.
    This would not result from the change we made last year in 
the higher education legislation by lowering the subsidy rate 
to lenders if, in fact, the overall credit markets were 
performing, is that a fair judgment? Mr. Remondi?
    Mr. Remondi. Yes, I do believe so. I mean, at the time the 
rates were cut, funding costs were at LIBOR-plus-ten, so it did 
impact materially the margin of profitability that lenders made 
in the Federal loan program. But the access today would not be 
an issue if those conditions continued to exist.
    Senator Reed. And do you agree, Mr. Deutsch?
    Mr. Deutsch. Generally, I agree, as well.
    Senator Reed. Thank you. The other issue, and again, this 
will reveal my ignorance rather than my knowledge of these 
systems. The Federal Reserve has been cutting interest rates 
with great energy over the last several months, yet this has 
not yet translated into something very palpable, like student 
loans that are affordable, is that accurate, and do you have a 
reason why that is happening, Mr. Remondi?
    Mr. Remondi. The interest rate on Federal student loans is 
fixed and set by Congress, so the----
    Senator Reed. Well----
    Mr. Remondi [continuing]. For the life of the loan, so as 
rates come down----
    Senator Reed. Let me rephrase that. There is an interest 
rate environment in which interest rates of financial 
institutions are being reduced dramatically by the Federal 
Reserve, and yet you are looking at LIBOR-plus-140 basis 
points. There seems to be no correlation between Federal 
Reserve action and what your borrowing costs. Can you----
    Mr. Remondi. That is--I mean, the index on which our 
borrowing costs is based has been falling, but the spread that 
we pay as a credit risk factor on top of that has been rising. 
So LIBOR is generally set as a risk--as kind of a risk-less 
kind of spread and the rate investors are demanding above that 
has expanded 14, 15 times, as we have heard.
    Senator Reed. I think one of the proposals that Senator 
Dodd was asking about and you seemed to think is useful is 
opening up the Federal Financing Bank. How should that credit 
physically be priced? If you are paying LIBOR-plus-140, how 
should the Fed price it so that we don't have a situation where 
we are reinstituting significant subsidies to you?
    Mr. Remondi. That is right. The Federal Financing Bank 
typically lends to various government agencies at Treasury 
bills plus one-eighth to three-eighths of a spread. We have 
proposed an interest rate in the Federal Financing Bank 
proposal that we have set forth, that that rate be set at 
commercial paper plus 40 basis points. That would be higher 
than the historical rates that we have paid to finance in the 
securitization markets in the past, but certainly it is a 
number and it is a number that is open to negotiation, 
obviously.
    Senator Reed. Mr. Deutsch, do you have any comments on the 
pricing issue?
    Mr. Deutsch. I would say that it is critical that 
originating lenders get access to funding that is at a price 
that they can sustain a business model of originating loans, 
and I think what you have seen right now is that it is simply 
unsustainable pricing that they are getting from the secondary 
market. So I don't have a specific opinion at this point on the 
exact price that it should be at, but I think that should be 
the benchmark that should be established.
    Senator Reed. Mr. Kantrowitz, do you have any comments on 
this whole line of questioning?
    Mr. Kantrowitz. Well, one benefit of a reverse student loan 
auction is that it would set the costs of capital 
competitively, so let the lenders bid commercial paper rate 
plus whatever they are willing to bear in order to get the 
liquidity.
    Senator Reed. Thank you. I notice, Ms. Flanagan, that the 
American Council of Education indicates that one in five 
borrowers pass up less expensive Federal student loans. Half do 
not even bother to file the paperwork necessary to qualify. For 
both President McGuire and Ms. Flanagan, if you have 20 percent 
of your students that are going to the higher-priced option 
right out of the box, is something wrong with counseling, 
financial aid advisors, something wrong with the way the 
marketing--can you give us any----
    Ms. Flanagan. There could be. I have seen that study and 
there are--we don't know at one level, but there are other 
reasons why people may not have exhausted all of their Federal 
borrowing before they are in the private market.
    One reason is that there are some places in this--48 
percent--this is another fact about private colleges--48 
percent--that will surprise people--48 percent of private 
undergraduates are first-generation in college, meaning that 
neither of their parents got a Bachelor's degree. A lot of 
those families classically will not even apply for a PLUS. I 
mean, you are 18 years old. You are on your own. Figure it out. 
You want to go to college? Maybe that is OK. We are from the 
same State. That is not OK for some of the ethnic groups. They 
want the kids to go right to work, and if they want to go to 
college, they are on their own. So I think that that is a 
factor here that doesn't show up in some of that data.
    Senator Reed. President McGuire, there seems to be--if this 
is the case, this study suggests 20 percent, what does that say 
about the counseling, the advice you are giving? I have dealt 
with financial aid officers in my home State of Rhode Island. 
They are remarkable. I mean, they go beyond to make sure that 
their students have the resources to stay in school. But is 
there something more that can be done, should be done?
    Ms. McGuire. Well, first of all, let me say that statistic 
may be true for some national cohort, but it is not true for 
Trinity. We have a very small number of students who are even 
eligible for private loans, let alone taking them.
    I think financial aid directors and staff work incredibly 
hard in one of the most complicated environments for any 
financial advisors anywhere. These packages have so many 
different elements to them.
    It is true, however, and it is even true with my students 
that families often are not financially as well-versed as we 
all wish they were. I find with the students we serve that 
there is a great deal of reluctance on the part of parents, the 
students Sarah just described, where if a young lady wants to 
go to Trinity or some other institution, she may be told by her 
parent, usually one parent, that she is on her own. She has to 
figure it out on her own. And frequently, the families will not 
cooperate even in sharing the tax records of the family or 
other sorts of information the student needs. Therefore, 
sometimes the student can get lost in the system if we don't 
pay very careful attention and she may wind up having not a 
good deal. She may have some uncle advising her to do the wrong 
thing.
    I think most financial aid officers try to get the best 
deal for their students all the time and I would like to know 
more from ACE, where the 20 percent really is.
    Ms. Flanagan. Can I add one other quick factor? I want to 
mention also, because this committee has worked on it, there is 
some direct--there has been some predatory direct-to-consumer 
lending in the private market and the Transparency Act that you 
have worked on that I know now is in conference with the Higher 
Education Reauthorization, it would change underwriting laws so 
that all private loans would have to also go to the financial 
aid office at the college and then the financial aid office, 
sometimes they don't even know that the students have gotten 
these things and filled out these loans and they can bring them 
in and counsel them. That is a really important step this 
committee has worked on and we thank you for your work.
    Senator Reed. Thank you very much. May I make one more 
comment, Mr. Chairman?
    Chairman Dodd. Certainly.
    Senator Reed. My time is expired, but there is another 
aspect of this, too, and that is the lending that parents have 
done entirely outside of this whole system by just going and 
getting a second mortgage on the house and sending the check to 
the school. That, I think, is another issue that is putting 
huge pressure on families where they can't do that any longer. 
So this demand is going to uptick, now looking at the Federal 
programs, private education loans, because the house is no 
longer the ATM, and that is something it is hard to factor in, 
but that has to be a factor.
    Chairman Dodd. Well, if I may just pick up on Senator 
Reed's point, credit cards, I mean, this is the one that really 
scares the heck out of me. The Washington Post reported, 
reflecting escalating college costs, 55 percent said they 
charged their books, and nearly one-quarter, 25 percent, said 
they pay their tuition with a credit card. So one out of four 
is paying tuition with a credit card. And obviously when you 
are talking about rates on credit cards, it----
    Senator Reed. Fix that.
    Chairman Dodd. Yes, fix that, Jack says. Thanks. They are 
getting in some cases 20, 25 percent rates of interest because 
they don't--navigating this system--it isn't just--anybody, I 
don't care how well educated you are, this is complicated 
stuff, and to sort it out and make sure you are getting exactly 
what you deserve, given your financial circumstances, is 
complicated.
    I can just tell you, for the hearing today, getting ready 
and sorting out the various ideas and programs and how they 
mesh together in a way is a complicated task, to ask the 
questions of those of you who do this every day. So the credit 
card problem is a growing one.
    And I pointed out earlier--somebody said this and I didn't 
get a chance to ask you about it, but the correlation directly, 
not just as a financial matter this is spreading, but the idea 
that on the Student Loan PLUS Program that you are disqualified 
from that program if you have been in foreclosure on your home 
in the last 5 years, so that 14-year-old--and we have 1,000 
people a day who foreclose on their homes. Eight thousand file 
for foreclosure. A thousand today actually foreclosed. What we 
are doing to that family today, denying them the opportunity to 
even qualify for student loans, well, that program, not all of 
them, but that one program--anyway, Senator Corker.
    Senator Corker. Thank you, Chairman Dodd. I listened to all 
the testimony but had to step out and miss some of the 
questions. I think I am not being redundant in asking this 
question.
    The Federal Financing Bank has been talked about as an 
immediate solution, and what we do here legislatively mostly is 
very clumsy and I think mostly misses the mark as far as trying 
to--I don't think we have even come close yet to focusing on 
the issue of liquidity. Yet it seems that there is a very 
simple solution, especially based on timing issues that all of 
you face with students and next fall.
    I was a little surprised with Senator Reed's questioning 
that last year's efforts, if you will, to take some money out 
of the private side, you had mentioned, was really not a 
problem, candidly, because the testimony I read from others 
says that it is. So it seems to me that we get back to again 
the first witness and talking a little bit about the Federal 
Financing Bank and it seemed like to me it is a surgical 
solution that works and is immediate and is the thing that will 
solve mostly the problem you are confronting. Do all the 
witnesses agree with that?
    Mr. Deutsch. Yes, absolutely.
    Senator Corker. So if that is the case, talk to me a little 
bit about what risk, if any--we understand there is very little 
risk, but what risk, if any, the taxpayer has in regard to 
using this vehicle, which again seems very surgical. It keeps 
legislators out of this, which mostly muck things like this up. 
Talk to me about the liabilities, if you will, from the 
taxpayer side.
    Mr. Remondi. Sure. Thank you. One point to just be clear, 
when you talked about the reduction in the yield that lenders 
received last fall, it was in the context if funding spreads 
were the same, at ten basis points----
    Senator Corker. Right, but with the Federal Financing Bank 
issue, what you are talking about, it seems like it does get it 
back to a spread that is reasonable, is that correct?
    Mr. Remondi. Yes, although if those legislative cuts had 
not taken place, FFELP lending would be profitable today and so 
the situation would not be as extreme as it is. As in anything, 
it is never one thing that causes all the problems, but----
    Senator Corker. Right.
    Mr. Remondi [continuing]. It does compound them 
dramatically. I want to just make that clear.
    Senator Corker. I think you are just putting an exclamation 
point on the unintended consequences of what we do here, but--
--
    Mr. Remondi. Correct. Now, in terms of the credit risk, the 
way we have recommended the Federal Financing Bank structure 
this program is that they would advance to lenders only against 
the government guaranteed portion of the loan, and so taxpayers 
in that sense would not be taking credit risk. If a borrower 
were to default, the payment would be coming to a lender in any 
case, regardless of where the funding source was, from the 
Department of Education, and that guarantee is up to 97 percent 
of principal and interest. So we are suggesting that the 
Federal Financing Bank only advance against that 97 percent and 
that the lender retain that risk-sharing component on their 
books. That way, the taxpayer is protected against any credit 
losses from students not paying their loans on time.
    Senator Corker. And that effort alone would reconstitute 
liquidity in the market and basically cause student lending to 
be off and running at norms?
    Mr. Remondi. Yes. We believe the direct injection of 
liquidity would be important by itself, but we think there are 
also significant benefits from investors, as well. We think 
investors will look at this step by the Federal Government as 
support for this program and will hasten their return to the 
asset-backed securities market.
    Senator Corker. So there is another solution offered in 
addition that talked about being able to access the Fed window. 
That would actually not be necessary under this scenario, is 
that correct?
    Mr. Remondi. That--it would not be necessary, that is 
correct. I think it is an additional benefit, and as any--one 
of the issues that we face and investors face in the term 
asset-backed market is liquidity is generally I don't trade 
with you when I am buying or selling a security. I go through a 
bank who acts as an intermediary, and banks right now--in the 
past, they would often hold these assets in their portfolio for 
a brief period of time in inventory, if you will, before they 
would find the buyer to match off against the seller. Right 
now, they are not doing that because they also have balance 
sheet constraints.
    The ability to borrow to pledge these securities to the Fed 
or through the Home Loan Banks, we believe creates funding for 
the intermediaries to create a more orderly secondary market, 
and that is--it is not a measurable benefit, per se, but we 
think it would have a significant impact on the trading of 
these securities in the marketplace.
    Mr. Deutsch. Senator Corker, if I might interject, I think 
the Federal Financing Bank would be as focused on the FFELP 
lending program and would provide direct liquidity to that 
program. I think the Term Securities Lending Facility, if AAA 
student loan asset-backed securities, both FFELP as well as 
private student loans were eligible collateral for that 
facility, it would help not only the FFELP program, but also 
the private student loan program, and I think that is one 
distinction between how the FFB could play an integral role in 
terms of helping originate FFELP loans, but also the lending 
facility could help provide additional liquidity in the private 
student loan market, which we have heard, I think, is very 
important for a lot of students today.
    Senator Corker. In the event, though, we were able to cause 
the FFELP program to reignite, if you will, and move ahead, the 
consequences of that over a short amount of time, though, would 
actually cause liquidity to return even on the private side, 
would it not, without the action you are talking about?
    Mr. Deutsch. Correct. I think by helping the FFELP lending 
market and providing liquidity directly there, it would provide 
effectively, if you think about all the capital out there, if 
investors, institutional investors aren't purchasing now the 
FFELP-backed student loan asset-backed securities, they can put 
that capital to work in the private student loan market, which 
ultimately would drive down those spreads.
    Senator Corker. Mr. Chairman, it is very seldom that people 
are able to come before us with a very simple solution to a 
pretty complicated problem that affects so many people, and I 
don't know what the full content of the letter you are talking 
about has in it, but I know that our Tennessee delegation is 
signing one that certainly focuses on this issue that they are 
bringing forth. I look forward to seeing what yours says. But 
it sounds like that without us, if you will, taking prolonged 
action that ends up being sort of cumbersome, there may be a 
solution to this. And I appreciate you very much coming to this 
hearing today.
    Chairman Dodd. Well, I am going to give you a copy of a 
draft of the letter in the next few minutes and have you look 
at it. It doesn't require any statutory authority. Obviously, 
this exists, so you don't have to go through--it is just a 
question of urging those in a position to do something about 
this and I think it would be a real help.
    I also believe, look, I mean, the subsidy cuts, people are 
talking about it, but I think the credit crisis, I think we 
would have weathered all of this with the subsidy cuts without 
any problem. I don't know if the witnesses would agree with 
that. I know those who raised that issue. But to my view, it is 
the credit crisis, not the subsidy cut, that finds ourselves in 
the situation we are in today.
    Mark, did you have any quick comments on any of this, 
particularly on Tom's point, from Senator Corker, on the second 
phase of this, on the private lending?
    Mr. Kantrowitz. Well, one aspect is the Federal Financing 
Bank has that $15 billion limit, and it is a $90 billion 
student loan market, so having the Term Securities Lending 
Facility accessible would also benefit in that regard.
    Chairman Dodd. Senator Brown.
    Senator Brown. Thank you, Mr. Chairman. Senator Corker 
talked about providing liquidity for the private loans and I 
would like to for a moment, from your testimony, Mr. Remondi, 
ask you a question. You had talked about providing liquidity 
for federally guaranteed loans. You said under this proposal 
the Treasury or some Federal Financing Bank would purchase 
through the life of the loan participation interest in pools of 
newly originated guaranteed loans from eligible FFELP lenders. 
Why not just buy the loans?
    Mr. Remondi. They could, although the loans are not fully 
guaranteed so that under the Federal Financing Bank statute, 
and I am not an expert in this in terms of what their rules or 
regulations are, but my understanding is they can only buy or 
finance assets that carry an explicit government guarantee. 
Federal student loans are 97 percent government guaranteed and 
so we have structured the proposal so that they can finance 
against that piece of the loan itself. The lenders would retain 
the risk sharing or the 3 percent risk that Congress had 
intended to begin with.
    Senator Brown. Treasury could do that, though, in your 
understanding?
    Mr. Remondi. I mean, I suppose--I don't know if they have 
statutory authority, Treasury would have the ability to buy 
loans, 100 percent of the loan interest directly. I can't 
answer that. I am sorry.
    Senator Brown. Fine. Thanks. Ms. Flanagan, I want to go 
back to what Chairman Dodd was talking about direct lending, 
that we have heard a number of suggestions on how to address 
the credit crunch with or without legislative change. Just one 
option for members that I haven't heard--I don't think I have 
heard discussed today, nor have my staff--sorry I came late--
can't they switch to direct lending?
    Ms. Flanagan. Yes. For the Federal loans, you are seeing a 
lot more schools going through the certification process, and 
there are a couple of factors with direct lending that you need 
to be aware of. One is the Secretary says you can only double 
it. Now, that is a pretty good downpayment, because if we have 
got close to $20 billion now in direct lending, you could go up 
to $40 billion, and that certainly is an action that many, many 
colleges are doing.
    One of the problems at the smaller colleges right now is 
this is absolute crunch time. I mean, literally, the last of 
the financial aid offers to families went out last week. They 
have to make their decisions by May 1. If you have got a small, 
lean staff, your ability at the same time to go through the 
software and the transitional issues--I think you will see more 
and more schools trying to do that over the next couple of 
months. It would be wise on their part to become certified. But 
we are just not sure that the Secretary--she has said she can 
only double it, so we may or may not still have a gap after 
that. But direct lending is absolutely an option and it is one 
that many schools are pursuing.
    Senator Brown. A couple of weeks ago, I had 40-some Ohio 
college presidents come to town and I spent much of the day 
with them. Some smaller schools--and I am not clear on this and 
maybe you can clear it up--some of the smaller private schools 
were talking about the difficulty of switching to direct 
lending. Is that what you were touching on there?
    Ms. Flanagan. It takes some time. It just takes some time, 
and one of the things that would be wonderful is if the 
Secretary could kind of look at it from the schools' point of 
view and say, are there ways to make the certification process 
faster for right now? Could we make it easier for schools? But 
yes, they are busy, particularly in the next 4 weeks, and it 
does take some time. You have got to get software. You have got 
to get people trained. I mean, there are absolutely appropriate 
due diligence things, but it absolutely is an option.
    Ms. McGuire. Senator Brown, I asked my financial aid 
director this very question the other day, and if she had a 
gun, I wouldn't be here today. Not to use administrative hang-
ups as an excuse, but the reality is the smaller institutions, 
what Sarah said is really true. There are both limitations of 
the hands-on-deck, if you will. This is crunch time. This is 
the time when the financial aid offices are trying to get the 
packages out the door. There is a lag time with the approval 
process to get certified and so forth. There are software and 
technological issues that many of us, you know, we need a run-
up period to that and we haven't even budgeted for the impact 
of doing that.
    A lot of times, people have a hard time understanding why 
higher education costs so much. For us smaller places, at 
least, we can tell you every dollar, and if we haven't budgeted 
for a software conversion in a given year, we have to put it 
off to another fiscal year, at least. So----
    Senator Brown. For either of you, Ms. McGuire and Ms. 
Flanagan, is there--one of the conversations I had with 
somebody from the--the chancellor in Ohio, his operation, and 
some of the presidents, is there a way the States can assist by 
pooling in some ways several smaller 4-year or several smaller 
private schools--well, they wouldn't necessarily be private, 
but smaller, more likely to be private--to assist with this?
    Ms. Flanagan. With the direct lending----
    Senator Brown. Yes, with switching to direct lending. If 
five or six schools have the bureaucratic problems that you 
mentioned, Ms. McGuire, just the budget problems and all, can 
they work together on a regional, State, whatever level to----
    Ms. Flanagan. They might be able to. Schools that are in 
direct lending love it and there are passionate debates which 
we stay rather neutral to. But people that are in it love it 
and there might be some assistance that they could provide----
    Senator Brown. But say if you have a dozen schools in Ohio 
that want to switch from FFELP to direct lending, could some 
outside force or some cooperative among them make that job 
easier?
    Ms. Flanagan. I think they could.
    Ms. McGuire. You know, I don't know if there is any 
regulatory inhibition. I am a fan of consortial efforts, if you 
will, and would like to see the model to do that. 
Unfortunately, I don't think D.C. is the place that will start 
it, so if Ohio does it, I would love to know.
    Senator Brown. Thanks. Consortial. I have never heard that 
word. Thank you for that.
    Ms. McGuire. A consortium with----
    Senator Brown. A consortium, I understand----
    Ms. McGuire. Consortiums, yes.
    Senator Brown. That is the third participle Latin for 
something. Never mind.
     [Laughter.]
    We have seen continued--sorry, Mr. Chairman. We are seeing 
obviously higher interest rates in private loans and we are 
going to continue to likely see them going up. If credit 
markets, as most of us believe, are driving the price higher 
and higher, why not create the direct--and this is for really 
anybody on the panel. I would like to hear from as many of you 
as would like--why not create to the private markets a direct 
Federal alternative?
    Mr. Kantrowitz. There is an alternative originator 
provision in the Higher Education Act so that the Department of 
Education could have its own originator, bypassing the schools. 
There is also provision for consortia of schools to get 
together and originate direct loans. I have heard that it would 
take the Department of Education 6 months to set up an 
alternative originator. They have yet to do it.
    Senator Brown. Anybody else?
    Mr. Remondi. Well, I think it is important to note--I mean, 
for some reason, 80 percent of schools have chosen to 
participate in the FFELP sector versus the direct lending 
sector, and I am sure as any program has its fans operationally 
on both sides, but today, 80 percent of schools are choosing 
FFELP for probably some of the reasons we have heard here 
today.
    We are trying to present a solution that addresses the 
problem for this immediate timeframe, this summer's academic 
lending season. This is not meant to be a permanent solution, 
it is temporary, and once we get over this hump of helping 
students pay for college this year and make sure they get in, 
we can then take, I think, a longer look at what is the best 
solution from a long-term solution, not a temporary solution.
    Senator Brown. Real briefly, Mr. Chairman. So to be clear, 
80 percent of schools, representing what percent of students, 
Mr. Remondi, do you know?
    Mr. Remondi. I think it is probably 80 percent of students. 
Eighty percent of loans get made in the FFELP sector. Direct 
lending's share, I think, was 18 percent last year.
    Senator Brown. Thank you, Mr. Chairman.
    Chairman Dodd. Well, it is a good point and I am 
particularly interested in hearing you say the consortia--there 
is a regulatory framework which would allow that. I think it is 
a very good point Senator Brown has raised. We get a lot of 
these small, independent schools of relatively small 
populations and tight budgets, the idea that they could form a 
consortia and apply as a consortia for the Direct Loan Program, 
I am glad to know that exists.
    I am disappointed to hear that the Department, as you say, 
is not funding this, or what are they not doing?
    Mr. Kantrowitz. The alternative originator provision has 
never been used by the Department. They have never set up a 
contractor to make loans to these students directly as opposed 
to requiring the schools to take on the administrative burden.
    Chairman Dodd. Yes. Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman. Let me thank you 
for having this hearing. I share the concern about all students 
having access to the possibility of a loan, but particularly 
low-income students because there was a time that I was in that 
category and pieced together financial aid in order to be able 
to go to a private institution in New Jersey who largely serves 
first-generation immigrant families for which it is a portal to 
educational opportunity and who have told me that they are 
feeling the crunch. So this is a real concern.
    But I am trying to--and I was watching from my office 
before I came here some of the testimony--I am trying to get a 
sense of how much of a challenge we have so that we can get a 
sense of the urgency of the matter. There are those who say 
this is being overdramatized, particularly student leaders who 
suggest that this is being overdramatized for the purposes of 
the loan companies making an issue about the subsidy cut and 
there are others who say it is real.
    So if you had a son or daughter applying for financial aid 
this year, on a scale of one to ten, ten being the worst, how 
would you describe the concern for them to get a loan?
    Mr. Remondi. I would put it somewhere between nine and ten 
right now, Senator.
    Mr. Deutsch. I would agree.
    Ms. Flanagan. We are not seeing problems at colleges yet, 
and I don't want to scare families. I actually have one of 
those children. My first of three is going to college this 
fall, so I am seeing this at both ends.
    Senator Menendez. So am I. I have one going to law school 
and I am trying to figure out what to do with him.
    Ms. Flanagan. It is scary. And I think the real--the folks 
who are scrambling are not the parents and the students right 
now. The colleges are scrambling. Somebody drops off the lender 
list. They are scrambling to get new people. So far, they have 
been successful at that and it will be the schools' job to 
scramble on behalf of the parents and students, and I think if 
they have any concerns, they should just walk right into their 
financial aid office and the colleges will do the work of 
finding the lenders.
    I am not trying to discount the fact that we could face a 
real financing problem. That is why we are all here today. But 
I think as far as sending--I don't want to send any signal to 
Americans that this system isn't going to be there for them, 
because I believe it will be and I believe one of the reasons 
it will be there is because we are having this hearing today 
and people are talking about it and people will find the 
alternatives.
    Senator Menendez. Mr. Kantrowitz.
    Mr. Kantrowitz. I believe that from the PLUS loan 
eligibility issue that Chairman Dodd mentioned and from 
tightening credit underwriting criteria for private student 
loans, at least 100,000 families are not going to be able to 
get those loans. So I think that just a percent or two of 
families are going to be directly and immediately impacted.
    As far as lender availability, I am more concerned about 
what is going to happen a year from now if there is no thawing 
of the capital markets and there is no government intervention.
    Senator Menendez. Let me ask you this, Ms. Flanagan. You 
said that when Secretary Spellings said that she could double 
the amount of the new loans, they could double the amount of 
the new loans made to students, if necessary, you said you are 
not sure if that is enough, or you are not sure if the 
Secretary would, in fact, double it?
    Ms. Flanagan. Both.
    Senator Menendez. Well, let us assume that it is doubled. 
What is the difference between the universe that is needed and 
the universe that exists? Do we----
    Ms. Flanagan. That would leave about 60 percent of the 
borrowing, of the $90 billion, if you added up private and the 
FFELP lending, about $70 billion of that is FFELP and about--or 
$70 billion of that is the Federal Loan Program, and of that--
$20 billion is in direct lending, so she could go to $40 
billion, and you have $90 billion altogether, which includes 
the private loan value. So you have a $50 billion gap. Now, we 
know there is some liquidity out there, but I just don't know 
how much.
    Senator Menendez. Jack, do you want to make a comment on 
that?
    Mr. Remondi. Well, as I said in my prepared remarks, I 
mean, right now, every loan we make today we are making at a 
loss, and I think every lender is in this same set of 
circumstances, and we are losing money before operating 
expenses, so it is that sizable loss issue. There is a limit to 
how much people will lend to Sallie Mae so we can then turn 
around and lend it at a loss. Not many people are in that 
business.
    I think each lender will have to ask themselves if there is 
no solution here and there is no long-term viability for the 
Federal Loan Program, that it has to be remade into something 
else, is do we lend at a loss this year? Do we continue to do 
it? Do we stop? Do we just exit and pull up just as the 50 
lenders that have already done so have demonstrated there.
    Mr. Deutsch. I think on the rest of the market, Sallie Mae 
obvious is a very large player in the market and has had and 
still has continuing access to the capital markets, even though 
it has been at substantially higher spreads. There are still a 
number of lenders out there, not just the larger players but 
the smaller players, who just simply have no access at 
virtually any rate to be able to access the capital markets and 
the results of that are that those lenders simply can't 
originate any new loans.
    I think the question of can the government Direct Lending 
Program, say, go from 20 percent of the market share to 40 
percent of the market share, we have already seen effectively 
$8 billion disappear, and I think we already expect, and it has 
been alluded to, that we expect a substantial amount more than 
that. So will that 20 percent, even if it was effectuated 
flawlessly, would that 20 percent be enough even on the FFELP 
side? I believe it is going to cause some serious concern as it 
gets closer and that doesn't include all the associated costs 
of switching over, of forcing colleges and universities to 
change their systems, incur the costs of new computer systems, 
et cetera.
    Again, the key point here is the timing, is that lenders 
are making the decisions now to lend. Students are going to be 
applying here in the next month, 2 months, for their student 
loans. So it is critical that that would be very difficult in a 
shortened span between now and, say, June, July, for all of 
those colleges and universities en masse, not just one or two, 
but a massive amount of those colleges to be able to switch 
over.
    Senator Menendez. So let me close. You both said anywhere 
between eight and ten in terms of my scale of gravity. Mr. 
Kantrowitz, you said 100,000 families----
    Mr. Kantrowitz. Yes.
    Senator Menendez [continuing]. Would not have the 
opportunity. Let me ask this last question, which is a little 
bit different dimension of the issue we have been talking 
about, but I think may be integrated. That is we are seeing a 
trend of lenders increasing the credit scores that are 
necessary to qualify, from the 620 to a 650. There is also some 
concern that some lenders are denying loans to students from 
schools with lower graduation rates, which often tend to be 
colleges with lower-income students. I am wondering, are these 
tougher requirements a symptom of a tightening market or do we 
have other things in play here?
    Mr. Remondi. Well, from a lender's perspective, they are 
certainly symptoms of a tightening market. But I think it is 
important to note, if we lend money to a student who does not 
complete their education, our view of that is that that student 
has now been harmed. They have incurred a debt burden and 
gotten no economic benefit from the college that they were 
attending. And so we work very hard to make sure that when we 
are lending to students, we understand what potential 
graduation rates are and that we are investing with them to 
pursue this higher education that will help them achieve their 
degree.
    Senator Menendez. I understand that and I agree, but are 
you looking at institutions or at the individual?
    Mr. Remondi. We are looking at--unfortunately, you know, 
you take ten kids at a school or 100 kids at a school, it is 
very difficult if not impossible to determine which kid is 
going to graduate, so you do look at graduation rates at the 
school----
    Senator Menendez. Are there kids today that would be denied 
an opportunity for a loan under your new set of standards that 
would not have been denied before?
    Mr. Remondi. Yes. Our standards have tightened this year.
    Senator Menendez. Yes?
    Ms. McGuire. Senator, may I just--there is a footnote in my 
formal testimony about graduation rates, and since you raised 
it, and I alluded earlier to this issue of tightening credit 
standards for certain students, I think it is very important to 
point out that the very students who need exactly this kind of 
Federal financial aid support, need the loans, both the 
federally guaranteed loans and even the private loans, are 
those who at times may look different from good credit risks, 
and that is part of what is a subtext of this whole discussion, 
if you will, that needs to be illuminated.
    The traditional method for calculating collegiate 
completion rates is deeply flawed and I, for one, am very 
concerned that lenders are using a rate that does not, in fact, 
actually reflect the number of students who complete college. 
The current rate used by the Department of Education is based 
simply on one cohort of students that enters 1 year and is 
tracked through the same institution for a 6-year period of 
time. A lot of students who leave one institution go to another 
institution and complete are treated as drop-outs. So there are 
flaws in the graduation rate method that are serious.
    The second thing is, there is clearly a disproportionate 
impact on low-income African-American and Hispanic students in 
this use of graduation rates and other kinds of criteria that 
discriminate against students and institutions who educate the 
neediest students in the country. Now, at Trinity, I am very 
pleased that we have an excellent completion rate for the 
population we serve. It is not as high as institutions that 
serve a middle-class population, but by the same token, I know 
a lot of institutions who are doing great service and the 
lenders need to be careful about the kind of benchmarks they 
are using in making these judgments because it will harm the 
very students who need the assistance.
    Senator Menendez. Well, Madam President, and I do like that 
term, Madam President----
    Ms. McGuire. Thank you. I do, too. Thank you.
     [Laughter.]
    Senator Menendez. I raised it because I am concerned about 
what I hear is an increasing chorus, because under some of the 
standards that are now being effectuated, I might not be here 
today.
    Ms. McGuire. Right.
    Senator Menendez. And we have to make sure that that is not 
a reality across the spectrum. I understand the difference 
between the type of appropriate lending requirements to ensure 
that there is safety and soundness, so to speak, but there is 
also an opportunity to move in a direction that I don't think 
we want to see. So we will be looking at it.
    Thank you, Mr. Chairman.
    Chairman Dodd. Let me just underscore the point Senator 
Menendez has made, and we have had hearings in the past on this 
very subject matter. This committee marked up the legislation 
that is now part of the higher education conference that is 
going on. This is redlining. This is redlining. That is all it 
is. We saw this practice being done in mortgages, where people 
were being excluded because of patterns of behavior and exactly 
the point that President McGuire has raised here.
    The idea that we would deny a young person the opportunity 
to get that loan based on the historic performance of that 
institution, in this day and age, that is just an unacceptable 
answer, in my view. Today, we have the capacity and ability to 
make far better determinations than sort of having a blanket 
approach where we write off institutions because they take 
chances on children who come from very different economic 
circumstances. I am just going to do everything I can to see 
that that stops. That is just inexcusable, in my view.
    Ms. McGuire. Thank you, Senator.
    Chairman Dodd. Well, it is tremendously important, and the 
other point, I think, Bob, you heard me raise here, and I will 
turn to Senator Schumer very quickly, but this whole notion, as 
well, about the foreclosure on the Federal PLUS Loan Program, 
where if you end up with a foreclosed property, you are 
excluded from that program for 5 years after the fact. And 
that, again, goes right to the heart of this. The idea we deny 
a child or a family from getting a higher education, 
particularly in this environment we are living in, who got 
lured into subprime loans--60 percent of them, of course, 
qualified for prime lending and they got lured into subprime 
loans where people were being paid commissions based on how 
high a rate they could charge you and get away with it and that 
person ends up in foreclosure and then their children are 
denied a college education on this is sick, in my view, and 
that has to change.
    Senator Menendez. Mr. Chairman, that is the equivalent of 
universal default.
    Chairman Dodd. In effect, it is. That is exactly the point, 
a good point. Credit cards, another point. Twenty-five percent 
of people paying for college on a credit card.
    Senator Schumer.
    Senator Schumer. Thank you, and thank you, Mr. Chairman, 
for having this hearing. I thank the witnesses. I am sorry I 
couldn't be here the whole time.
    I guess my great worry here is that already students are 
making decisions either not to go to school, drop out of 
school, not to go to the school that they deserve to go to, 
want to go to, because they are worried about the inability to 
get loans. And the one thing I would say at the outset is this. 
I think we need a little bit of calming here in the sense that, 
first, it may well be that the markets bounce back in time, OK. 
There will be people who drop out, but others will come in and 
take their place. We have seen with government loans, you know, 
municipal borrowing, that at first there was a spike and then 
people said, hey, it is a pretty good deal to lend money to a 
State government or a port authority for eight or 9 percent 
instead of the four or five that is usual and they came back 
in. So I do not--I think this could become a crisis, but I 
agree, we are not there yet, and the one thing I would say to 
people is don't panic, don't change your plans at this point.
    And the second point is we will provide some back-up. This 
is just too important to allow 100,000 people who deserve to go 
to college not to be there. Whether it is what Senator Kennedy 
and Senator Miller have proposed, which is that the Education 
Department ultimately come up and back-up the loans, the 
Federal Financing Bank, which the administration is looking at 
it, I think we can say with virtual, if not virtual certainty, 
like a 98 percent chance, we will not--it is our obligation not 
to let a single person not go because they can't get a loan, 
not go to school or continue in school or not go to the school 
they deserve.
    And at least my reading on this issue is there will be a 
bipartisan strong effort to make sure that doesn't happen, 
period, and I think we should send some assurances out to all 
of those who have gotten into college and are ready to start 
and those who are in college and are thinking of changing. 
Don't panic, because at this point, A, the markets may come 
back, and if they don't, we will have to step in. College is 
our future, and every time somebody who doesn't come--
    So my first question, first to Ms. McGuire, have you seen 
among your students, and then any of you and particularly Mr. 
Kantrowitz, are already people changing their plans? Have you 
seen people decline admission who might have gone normally? 
Have you seen people saying they are going to not continue from 
junior to senior year or whatever? Are we at that stage yet?
    Ms. McGuire. Senator Schumer, certainly not among our 
students at Trinity, and I do appreciate the passion of your 
desire to fix this before it becomes a problem. I agree with 
you, as Sarah Flanagan testified, that we are not at a place 
yet where we see this as a panic. I am concerned that the buzz 
in the marketplace is going to make people panic needlessly and 
that is a serious concern.
    Senator Schumer. Right.
    Ms. McGuire. Now, I will also say that because of the 
students we serve at Trinity, which again gets back to who 
needs these loans the most, they are frequently independent 
students from low-income families who don't have a history of 
even applying for financial aid. They often do all of this very 
late, and the other side of the coin that I worry about is, we 
have students--we enroll our students and we admit them to 
school when they haven't even finished their financial aid 
packages and we manage something called receivables, which is 
also another thing I didn't even testify about.
    Senator Schumer. Right.
    Ms. McGuire. My concern is that we will have all these 
students in school in the fall and then somewhere around 
October, November, December, we will see them being denied 
loans when we admitted them and brought them in and will take 
care of them and we can't afford that.
    Senator Schumer. That is a great point, and it is also you 
hear these things and it is so confusing. My daughter applied 
to law school last year. I have one in college. We can afford 
on our salaries to pay for college for both kids, but not 
graduate school. It was Yale Law School in my good friend's 
State and I got the little booklet, you know. I am a lawyer. I 
didn't understand it. There were so many questions that I had 
about this.
    So one thing that is really important, and this relates to 
a longer term, is disclosure in the higher education bill which 
is now in conference, a provision for the so-called Schumer 
Box, which I had written, and I know Senator Dodd had supported 
and helped put in the bill, to make it very clear all of these 
points which helped with credit cards and can help with student 
loans. I was just amazed how confusing it was.
    Ms. McGuire. I appreciate that.
    Senator Schumer. And I think that added to all the talk in 
the markets and the talk and everything else and people say, 
the heck with it, because it is hard to work your way through. 
And then we had a nice lady at the law school, we got her on 
the phone and she helped walk us through it. But we didn't 
know--it was so unclear when you start paying, when the 
interest rates start compounding, which was a better plan for 
us and our family situation. So that is a very important point 
and I would urge all of my colleagues that we pass this bill 
that is now in conference, the higher education bill, to clear 
this up as quickly as possible. It is a big improvement and it 
is in conference now.
    But I wanted to ask you, Ms. Flanagan, the same question I 
asked Ms. McGuire. Are you finding people already, are you 
hearing from your member institutions?
    Ms. Flanagan. Ask me in 4 weeks.
    Senator Schumer. OK. It is too early to tell yet.
    Ms. Flanagan. The deposits are due on May 1 and it will 
take us a couple of weeks to find out----
    Senator Schumer. And do you agree with the view no one 
should panic at this point?
    Ms. Flanagan. Absolutely.
    Senator Schumer. OK, that there is----
    Ms. Flanagan. I said it two or three times this morning and 
I say it again.
    Senator Schumer. OK. Mr. Kantrowitz.
    Mr. Kantrowitz. I have already heard from schools that have 
had lenders representing 50 percent or more of their loan 
volume exit the program, and these schools then have to 
scramble to find new lenders for----
    Senator Schumer. And how are they doing with that?
    Mr. Kantrowitz. They seem to be fine. They haven't had 
trouble finding new lenders as of yet, but there has been no 
sign of any calming of the capital markets and every day, I 
hear about new lenders leaving the loan programs.
    Senator Schumer. Right.
    Mr. Kantrowitz. I have also heard from students, and this 
is all anecdotal, one-on-one, that are worried about the 
situation and they are considering attending less-expensive 
schools.
    Senator Schumer. Yes. I worry about that, too.
    Mr. Kantrowitz. So I haven't heard of any students dropping 
out except for the Silver State Helicopters issue, but their 
students are very worried about this and it is affecting their 
college choice.
    Senator Schumer. Yes. Well, just my reading of it, again, 
as one Senator who has been around a little while, not as long 
as some, we will have to step--if somehow the markets, they 
can't find replacement lenders, more people drop out, we are 
going to have to step in. There is no question about it, and 
last night, I talked to my landlord, who happens to be George 
Miller, and my roommate, and he is pushing that the Education 
Department do it and he thought that would have pretty easy 
sailing in the House. Senator Kennedy is doing that in the 
Senate, and then there is, as I said, the Federal Financing 
Bank, which the administration somehow or other, we are going 
to have to--this would be just unpardonable to let happen in 
housing happen here now and not move in early and quickly. So I 
think it will.
    Any comments from you, Mr. Remondi or Mr. Deutsch?
    Mr. Remondi. We have seen, in April so far, we have seen a 
26 percent increase in applications over last year, so clearly 
students at these schools that have lost lenders are finding 
their way to Sallie Mae. I think the vast majority of lenders 
are continuing to lend right now, but they are looking for a 
solution and we are hopeful and very pleased at your comments 
and support that something needs to be done, and we think the 
Federal Financing Bank is the best solution for the time at the 
moment.
    Senator Schumer. Right. Mr. Deutsch.
    Mr. Deutsch. Senator Schumer, I think it is critical that 
the government exercise some leadership in this regard. I am 
very heartened by your comments, and I think the market should 
be very heartened by the comments that the government will take 
steps to make sure that students do have access to loans. I 
think right now, it is very disconcerting to lenders to be 
originating loans effectively at a loss.
    Senator Schumer. Right.
    Mr. Deutsch. That is just an unsustainable business model. 
I don't think anybody here, anybody in this room wants to see 
any student----
    Senator Schumer. Mr. Deutsch, in the last week, is the 
trend getting better or worse? I know it is----
    Mr. Deutsch. The trend has gotten worse.
    Senator Schumer. OK, up until this moment?
    Mr. Deutsch. I think the trend has gotten worse and I think 
the trend will continue to get worse over the ensuing weeks.
    Senator Schumer. OK. Thank you, Mr. Chairman.
    Chairman Dodd. Great points, Senator, and I, in fact, made 
the point at the outset of the hearing that I call this a 
concern. Now, you may calibrate ``concern'' however you want, 
but I agree, the last thing you want to do is have panic set 
in. But as my colleague from New York will tell you, as I 
mentioned, a year ago, we had the concerns about the 
residential mortgage market and we tried to get people to react 
to the concerns and, of course, we had a lot of delay and 
timidity in the process and we ended up with a crisis.
    Senator Schumer. Yes.
    Chairman Dodd. So I agree with you here. I can't imagine 
anyone allowing this problem to slip into the crisis phase, but 
I don't want to make the mistake we did a year ago. I didn't 
think that would happen, either, in that issue, and----
    Senator Schumer. Mr. Chairman, that is why I think these 
hearings were timely and appropriate and needed and I am glad 
you held them.
    Chairman Dodd. And, in fact, before you came, Senator 
Corker indicated an interest. We are going to put a letter 
together today, Chuck, to Secretary Paulson on the Federal 
Financing Bank issue, which really does two things. First of 
all, that program only affects the FFELP program, but if you 
can begin to unleash capital there, we also think it would work 
into the private lending area, as well. So it could have the 
benefit there.
    There is a second phase of this thing and that is access to 
that discount window, but that would take a little bit more of 
a hurdle for some going over than I would, frankly. But 
nonetheless, we think it would help.
    So we are going to continue to monitor this, but this 
hearing has been helpful and raising these issues are 
tremendously important. So we will continue to urge 
involvement. We will leave the record open. I know that other 
members would like to raise some additional questions.
    You have been terrific witnesses, all of you, very, very 
helpful. I can't tell you how much I appreciate your testimony 
this morning.
    With that, the committee will stand adjourned.
    [Whereupon, at 12:11 p.m., the hearing was adjourned.]
    [Prepared statements, responses to written questions, and 
additional material supplied for the record follow:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT] 


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY FROM JOHN F. 
                            REMONDI

Q.1. Secretary Spellings is considering exercising her 
authority to invoke an emergency safety net that would make the 
guarantors of federally backed loans into lenders of last 
resort. It seems that the experimental nature of such a program 
would make it slow and cumbersome. How will it affect the 
students that are applying for financial aid to go to school 
this fall, if at all?

A.1. The least disruptive solution for students and financial 
aid officers should be geared toward averting a student loan 
crisis this year. To that end, we support efforts to take 
budget neutral steps, as outlined in H.R. 5715 or through the 
U.S. Treasury Department's Federal Financing Bank, to provide 
student lenders immediate liquidity so the Department of 
Education will not have to implement its lender of last resort 
program.
    Nevertheless, we support the provisions in H.R. 5715 giving 
the Department of Education the mandatory authority to advance 
federal funds to guaranty agencies designated as lenders of 
last resort. We also support the bill's provision authorizing 
the Secretary of Education to designate an institution of 
higher education for participation in the lender of last resort 
program. As the largest originator and servicer of Federal 
Family Education Loan Program loans, Sallie Mae stands ready to 
assist the Department of Education and the nation's guarantors 
with the implementation of a lender of last resort program. In 
this economic environment, such action is prudent.

Q.2. As we consider different ways to address the state of 
these fiscal markets there are a number of proposals, and they 
all deserve consideration. But I would like to make sure we 
fully understand this issue. To the extent that you can tell us 
today, as opposed to the future when we will know more, how 
much is the current market turmoil temporary, and how much can 
we expect that in some ways these markets will be changed 
forever? I ask because, as we consider solutions, we need to be 
mindful of whether we would be creating permanent Federal 
interventions when we might only intend temporary ones.

A.2. The financing of student loans is reliant on well-
functioning and well priced credit markets, but these markets 
have been severely disrupted in the past eleven months. Funding 
costs for student loan securitizations have increased rapidly 
and significantly during this period. As a result, every 
federal loan funded in the asset-backed securities market 
generates a loss even before operating expenses. We are hopeful 
that the expeditious implementation of H.R. 5715 will send a 
signal to the markets that the U.S. government stands behind 
these guaranteed assets and will thus provide more liquidity in 
the capital markets. Because our business model is based on 
funding through the issuance of asset backed securities, we 
prefer to fund our loans through the private capital markets 
and view a government solution as a temporary one. In fact, the 
prospects of a solution have contributed to a tightening of 
spreads in the asset-backed markets. Despite this, current 
funding costs still mean each loan made is made at a loss.
    It should be noted that the reductions in the College Cost 
Reduction and Access Act will make it difficult for this market 
to fully recover. The credit market reductions have made clear 
that the yield on the loans is inadequate to absorb even 
temporary market disruptions. We look forward to working with 
Congress to improve the foundation for the FFEL program, to 
maintain the benefits of competition while assuring that future 
market disruptions will not threaten the availability of 
federal loans.

Q.3. There are proposals to allow Federal Home Loan Banks to 
take some of these securitized loans as collateral and thereby 
inject some liquidity into the market. Congressman Kanjorski 
and Senator Kerry have proposals to do that. How does this 
compare with the other proposals? Do you think the Home Loan 
Banks would use that authority? And, would such a proposal 
present any dangers for the Home Loan Banking system at a time 
when they are already doing so much?

A.3. H.R. 5723 and S. 2847 both authorize the Federal Home Loan 
Bank (FHLB) system to invest in student loan securities with 
surplus funds and accept student loan collateral. They also 
permit them to provide advances to FHLB member banks to 
originate student loans or finance student loan securities. We 
view these authorities as important components of a larger 
long-term solution to the student loan liquidity crisis.
    In introducing H.R. 5723, U.S. Representative Paul E. 
Kanjorski (D-PA), chairman of the House Financial Services 
Subcommittee on Capital Markets, Insurance and Government 
Sponsored Enterprises, addressed the soundness and safety issue 
when he stated that ``the addition of this temporary power is 
closely in line with the existing mission of the Federal Home 
Loan Banks to support community and economic development.''
    He further stated that H.R. 5723 includes safeguards to 
ensure that the Federal Home Loan Bank system invests in 
collateral that is federally guaranteed and carries the highest 
investment ratings. AAA/Aaa rated student loan asset backed 
securities which are backed by loans made under the Federal 
Family Education Loan Program carry a high rating because they 
are low-risk. Giving the FHLB system these authorities will be 
beneficial not only to FHLB member banks but to students and 
borrowers who will benefit by increased access to education 
credit.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI
                      FROM JOHN F. REMONDI

Q.1.a. Each of you has emphasized the urgency of the credit 
environment facing students and families as they prepare for 
the upcoming academic year. Mr. Remondi, you pointed out that 
student lending is ``seasonal'' in nature.
    I would like to hear from each of you an assessment of the 
``point of no return''. When does Congress need to act, if it 
becomes necessary to legislate a Federal response to this 
issue?

A.1.a. The peak lending period began in April and ends in 
September. During this time period, more than three-fourth of 
all loans will be made. As I stated in my oral testimony, 
Sallie Mae's new loan applications have increased by 26% in 
April over last year. At current borrowing rates, lenders lose 
money on every loan made. As a result, we believe that a gap 
between available loans and the demand for them could manifest 
itself at any time.
    On May 7, 2008, President Bush signed H.R. 5715, the 
Ensuring continued Access to Student Loans Act, which would, 
among other things, give the Secretary of Education the 
authority to purchase loans from eligible lenders upon the 
determination by the Secretary that there is inadequate loan 
capital to meet the demand for loans whether as a result of 
inadequate liquidity or other reasons.
    Sallie Mae supports H.R. 5715 and we are pleased that 
congress moved quickly to enact it. Because the peak lending 
season is underway, we are hopeful that the U.S. Department of 
Education and Treasury will outline and implement a 
comprehensive plan, that includes immediate liquidity, in the 
form of federal capital, into the student loan program as 
quickly as possible so lenders can continue to serve students 
and schools without interruption.

Q.1.b. Please also consider whether a ``sunset'' should be 
attached to these measures.

A.1.b. The Secretary of Education's authority to purchase loans 
under H.R. 5715 expires on July 1, 2009. It is the hope and 
expectation of those involved in the student loan market that 
the capital markets will improve enough by that time to sustain 
a viable and competitive FFEL program.

Q.2. You each bring a different perspective to the question of 
how the uncertainty in the credit markets will impact access to 
student loans.
    Could you provide us with an indication of what students 
may be ``hit the hardest'' if access becomes a problem this 
summer? Lower income students? Middle-class students? First-
generation students and families? Nontraditional students?

A.2. The unprecedented increase in the cost of borrowing for 
lenders, the closing of auction rate markets, and the 70 basis 
point cut in the Special Allowance Payment contained in the 
College Cost Reduction and Access Act are having an impact on 
all students. As a result, each new loan made today is made at 
a loss. The U.S. Department of Education estimates that 7.1 
million borrowers will need Federal Family Education Program 
loans this academic year. So far, lenders representing 20 
percent of all originations have discontinued their 
participation in FFELP. These changes have and will likely 
continue to affect borrowers representing all socio-economic 
groups.
    Testimony from Trinity College President Patricia McGuire 
at the April 15, 2008 Senate Banking Committee's hearing on the 
impact of turmoil in the credit markets clearly demonstrates 
how students from low-income families could be impacted by any 
disruption of the delivery of student loans. She stated that: 
``nearly 90% of Trinity's students today are Black, Hispanic, 
Asian or international in their immediate family identities, 
and more than 95% are low-income students who receive 
substantial unfunded tuition discounts in order to attend 
Trinity.'' She stated further that Trinity students ``do not 
have the means to support our students if the federally 
guaranteed or the private loan programs are jeopardized.''

Q.3.a. Thank you Mr. Remondi, for appearing before the 
Committee. In your capacity as Chief Financial Officer at 
Sallie Mae, you have unique insight into the interplay of the 
private education loan market and the government-guaranteed 
education loan market.
    Please provide the Committee with a sense of how the 
interacting between the private loans and guaranteed-loans in 
your portfolio affects the services that Sallie Mae offers to 
students?

A.3.a. Paying for college is one of the most significant 
financial decisions a family will make. As the leading saving 
and paying for college company, Sallie Mae takes a 
comprehensive approach to making college possible for students 
and families. Our policy is to promote a 1-2-3 approach. 
Through our Upromise subsidiary, we encourage families to start 
planning and saving for college early. We urge families to use 
their personal resources, scholarships and grant money first. 
Second, we urge that they utilize low-cost federal loans and 
lastly, only as needed to close the gap between the cost of 
attendance and available funds, to take advantage of private 
loans. Additionally, the industry leading services we provide 
are often directly related to the efficiencies and margins that 
we can achieve through both federal and private loans.
    One of the most important factors in having one lender for 
both federal and private loans is in the benefit for borrowers 
and the effect on defaults. It has been a well-established 
principal of the federal program that borrowers are less 
inclined to default if all of their loans are with one lender. 
With one stop, one payment, borrowers are less inclined to miss 
payments on their student loans.

Q.3.b. Does instability in the private loan market affect 
Sallie Mae's provision of guaranteed-loan products to students?

A.3.b. Not directly. However, disruption in the private credit-
based asset back securitization market has been particularly 
challenging over the past year. There is currently no market 
for the securitization of private credit-based loans and 
several major lenders have ceased making private credit-based 
loans or insuring them.

Q.3.c. Do cuts in the FFEL program affect Sallie Mae's ability 
to provide private education loans to students?

A.3.c. Cuts in the FFEL program do not affect Sallie Mae's 
ability to provide private education credit to students. Our 
financing lines are distinct for each type of loan. The 
interest rate for FFELP loans are set by Federal statute while 
those for private loans are credit-based.
    As stated earlier, cuts in the Federal Family Education 
Loan Program and credit market turmoil have made FFELP loans 
unprofitable and will affect our ability to continue to make 
them if a Federal plan to provide capital to lenders is not 
implemented.
                                ------                                


RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY FROM TOM DEUTSCH

Q.1. Secretary Spellings is considering exercising her 
authority to invoke an emergency safety net that would make the 
guarantors of federally backed loans into lenders of last 
resort. It seems that the experimental nature of such a program 
would make it slow and cumbersome. How will it affect the 
students that are applying for financial aid to go to school 
this fall, if at all?

A.1. The Ensuring Continued Access to Student Loans Act of 2008 
provides for a mechanism of funding loans that seeks to 
alleviate the disruptions of the current credit market 
conditions without having the FFEL lenders seek assistance from 
the lender of last resort program that was not designed for 
across the board market disruption. Although this legislation 
may provide a fix for funding concerns this fall, Congress 
should consider long-term legislation for future funding 
seasons that efficiently matches FFEL lenders cost of capital 
in the secondary market with the rates and special allowance 
payments that they receive at origination.

Q.2. As we consider different ways to address the state of 
these fiscal markets there are a number of proposals, and they 
all deserve consideration. But I would like to make sure we 
fully understand this issue. To the extent that you can tell us 
today, as opposed to the future when we will know more, how 
much is the current market turmoil temporary, and how much can 
we expect that in some ways these markets will be changed 
forever? I ask because, as we consider solutions, we need to be 
mindful of whether we would be creating permanent Federal 
interventions when we might only intend temporary ones.

A.2. Credit market conditions and the ultimate price that 
lenders have to pay for capital in the secondary market are 
certainly higher now than anytime in recent memory. Although 
numerous steps are being taken by the industry and by banking 
regulators to improve the confidence in the U.S. capital 
markets, the cost of capital will always fluctuate appreciably 
as market forces define the price of that capital. In many 
funding seasons that cost of capital will be limited to a 
narrow band, but in some funding seasons such as the one we are 
currently in, the cost of capital may rise to the point where 
originating student loans is uneconomical. Longer term fixes 
need to address these potential cost issues to avoid future 
disruptions in the availability of student loan credit.

Q.3. There are proposals to allow Federal Home Loan Banks to 
take some of these securitized loans as collateral and thereby 
inject some liquidity into the market. Congressman Kanjorski 
and Senator Kerry have proposals to do that. How does this 
compare with the other proposals? Do you think the Home Loan 
Banks would use that authority? And, would such a proposal 
present any dangers for the Home Loan Banking system at a time 
when they are already doing so much?

A.3. Proposals that are still outstanding allowing the Federal 
Home Loan Banks (``FHLBs'') to purchase student loan asset-
backed securities (``SLABS'') could provide some additional 
liquidity to both FFEL-backed SLABS as well as private loan-
backed SLABS. Since FHLBs have not previously purchased SLABS, 
nor have they made any public statements regarding their 
willingness to purchase SLABS, it is not clear to what extent, 
if at all, they would exercise their new authority to purchase 
SLABS. The Federal Reserve Bank of New York's decision to allow 
SLABS to be pledged as eligible collateral to the new Term 
Securities Lending Facility has provided some much needed 
liquidity to the secondary market for SLABS. The FHLB proposals 
could inject additional liquidity into this market, but given 
the uncertainty of the FHLBs purchasing of SLABS, the extent of 
that additional liquidity is uncertain/limited.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR TESTER FROM TOM 
                            DEUTSCH

Q.1. As we believe Montana student loans are fully funded for 
the next year--Montana's student lender has secured its 
financing for the upcoming academic year--does it seem that the 
existing finance mechanisms will improve in the coming months 
or do we need to start shifting all student loans away from 
auction rate bonds?
    Should student loan companies feel comfortable using the 
auction-rate-securities market even if the economy improves?

A.1. Existing finance mechanisms, including securitization, are 
likely to continue to improve slightly through the summer, but 
financing FFEL or private student loans in the capital markets 
would still likely lead lenders to significantly curtail their 
originations. Although funding spreads have come in by 
approximately 30 basis points since late March, originators 
would still be incurring 10 times the capital cost expense 
compared to their cost of capital from one year ago.
    The recently enacted Ensuring Continued Access to Student 
Loans Act of 2008 (``Act'') may provide sufficient capital at 
reasonable rates for FFEL lenders to meet most FFEL student 
loan demand this fall. Although the Act provides for assistance 
to FFEL lenders, the Act does not address the shortfall of 
private student loan availability that is expected to occur 
this fall.
    Student loan originators have eliminated their use of 
auction rate securities (``ARS'') as a funding mechanism in the 
current market environment. Given the recent fails in the 
auctions for outstanding ARS, investor appetite for this 
product has disappeared. Although the underlying collateral 
performance of outstanding FFEL loans in ARS is still 
performing as expected, the performance of ARS in the current 
liquidity constrained environment has led to a predominant 
market view that ARS may not be viable funding mechanism going 
forward.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI
                        FROM TOM DEUTSCH

Q.1. Each of you has emphasized the urgency of the credit 
environment facing students and families as they prepare for 
the upcoming academic year. Mr. Remondi, you pointed out that 
student lending is ``seasonal'' in nature.
    I would like to hear from each of you an assessment of the 
``point of no return''. When does Congress need to act, if it 
becomes necessary to legislate a Federal response to this 
issue?
    Please also consider whether a ``sunset'' should be 
attached to these measures.

A.1. The Ensuring Continued Access to Student Loans Act of 2008 
(``Act'') was enacted expeditiously and promises to alleviate a 
significant portion of the funding concerns for this fall's 
lending season. Although this legislation may provide a fix for 
funding concerns this fall, Congress should consider 
legislation for future funding seasons that efficiently matches 
FFEL lenders cost of capital in the secondary market with the 
rates and special allowance payments that they receive at 
origination.

Q.2. You each bring a different perspective to the question of 
how the uncertainty in the credit markets will impact access to 
student loans.
    Could you provide us with an indication of what students 
may be ``hit the hardest'' if access becomes a problem this 
summer? Lower income students? Middle-class students? First-
generation students and families? Nontraditional students?

A.2. Entering students (i.e. freshman, 1st year graduate 
students) may be ``hit the hardest'' because lenders already 
have made loans to existing students in previous years and have 
a very strong economic interest in continuing to help fund 
returning students education to its completion. Borrowers who 
complete their education are much more likely to pay back the 
entirety of their outstanding loan obligations. As lenders are 
having to make difficult choices how to allocate their 
available capital, given this lending season's current 
constraints, lenders are more likely to allocate scarce funds 
to existing students with outstanding student loan obligations 
to that lender rather than to those who are entering school and 
don't have preexisting loan obligations from that lender they 
may default on.
    Also, students who are more reliant on private student 
loans making up the difference between the maximum available 
from Stafford or PLUS sources and the cost of their education 
will also be ``hit the hardest'' because if those private loan 
funds are not available this fall, those students may simply 
not have sufficient access to funding to continue or start 
their desired education.

Q.3.a. In your testimony you have laid out a persuasive case 
that larger market forces are at work with respect to students 
and families having access to the financing they need to attend 
college. Is the Secretary of Education equipped to respond to 
these disruptions?

A.3.a. The Ensuring Continued Access to Student Loans Act of 
2008 provides significant direction for the Secretary to 
address the current cost of capital disruptions that FFEL 
lenders are confronting. Although this measure and other steps 
taken by the Departments of Education and Treasury should help 
alleviate the capital disruptions this year, I should reiterate 
that Congress should consider legislation for future funding 
seasons that efficiently matches FFEL lenders cost of capital 
in the secondary market with the rates and special allowance 
payments that they receive at origination.

Q.3.b. To what extent should we leave this to the banking 
regulators and those with expertise in situations such as 
these?

A.3.b. The root of the existing difficulty is that if the costs 
of capital rise to a certain point, FFEL lenders may be faced 
with originating loans at a loss, given the limit on the rate 
they are able to charge to students and the limited special 
allowance payments. Although the industry and banking 
regulators are actively working to help address current market 
disruptions and help prevent future market disruptions, the 
cost of capital for student loan lenders may again be so high 
that they would face significant losses by continuing to 
originate loans.

Q.3.c. How should short-term proactive solutions differ from 
the long-term corrective measures that will restore confidence 
in our credit markets?

A.3.c. The short term steps taken to address student loan 
lenders cost of capital difficulties have been targeted and 
necessary steps to help ensure sufficient access for students 
to government subsidized loans. Longer term corrective measures 
to restore confidence in our credit markets should be focused 
on ensuring institutional investors' have access to the 
information and risks associated with the securities and the 
underlying collateral that they purchase.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY FROM SARAH 
                            FLANAGAN

Q.1. It appears that with the tightening of credit standards, 
low-income students will be disproportionately affected. Can 
you explain the progression, how this will play out in May or 
July and later in the year when tuition payments will be do?

A.1. Yes, the tightening of credit standards are likely to 
affect low-income students. However, several of our members 
have told us that they think middle-income students will face 
difficulty as well. (For additional detail see answer to Sen. 
Enzi's question and the charts above.)
    In regard to the student aid process, here is a thumbnail 
sketch. Most students received their college acceptance letters 
and student aid award notices by mid-April, at the latest. They 
then began to make their decisions based on that information, 
the results of appeals for additional aid, and being placed on 
acceptance wait lists. Once settled on a college and the final 
aid package is determined, the institution, based on the 
student's payment plan for any remaining obligation, will bill 
the student/family accordingly. Billing could start in late 
spring or more likely in midsummer in advance of the school 
year. Students without sufficient grant or federal loans funds 
to cover their cost of attendance will seek private loans to 
fill the gap. Most of the private loan applications should be 
taking place in mid- to late-summer. This is when we will have 
a better idea if lenders have capital to lend and if so, to 
whom they are willing to lend.

Q.2. Which students, families, and schools will be impacted 
first, and what will their options be if they are unable to 
obtain federal student loans? How will the education section be 
affected and will they be doing anything to assist low-income 
students and others who are denied loans so that the stream of 
students matriculating to their institutions is not 
interrupted?

A.2. Our institutions will assist their students to the best of 
their ability. To a large degree it will depend upon the 
resources that the institution has to help students. At this 
point most schools don't know what loans will be available to 
their students. Only later in the summer will they determine 
what the need is and if it can be met with institutional 
resources. At least one state, as described above has 
established a way for students to borrower from a local bank 
without a co-signer. If there are delays in the processing of 
either FFELP or private loans, schools may provide short term 
institutional loans. (See the answer to Sen. Tesser, question 
#1.)
    Financial offices will work with students and parents to 
explore all options so students have access to college and can 
complete their degrees. Colleges have a huge incentive to help 
current students stay in school and finish. It costs much more 
to recruit new students than it does to retain current 
students. And, we know our graduates are responsible borrowers 
who repay loans. So, the challenge is helping them get through 
as quickly as possible with as little debt as possible. 
Attaining a degree is essential to future economic success and 
personal satisfaction.
    Thank you for also asking what the impact could be on our 
colleges. While it is fitting and appropriate for us all to 
focus first and foremost on our students, we also must be 
mindful of the potential negative impact of the credit crisis 
on our colleges own fiscal health. Most private colleges depend 
on tuition to survive. We call these schools ``tuition 
dependent.'' While every college raises charitable funds to 
supplement the cost of education (Tuition alone does not cover 
the cost of any college's undergraduate education in this 
country.), some colleges are more at-risk if enrollments 
decline than others. As a matter-of-fact, every year several 
private colleges with long-standing traditions of educational 
excellence close. The communities in which they are located 
usually suffer as well when the local college closes.
    We are seeing some regional enrollment problems this year. 
In some areas of the nation, private college enrollments seem 
to be down, even though this fall's class marks the entrance to 
college of the largest birth year for the children of baby-
boomers (1990). We are closely watching this development to see 
how enrollments actually materialize in September.
    A final aspect of this crisis is the impact on the economic 
stability of private colleges faced with a demand for increased 
institutional aid to keep students enrolled. Sometimes when a 
student reaches a fiscal crisis and a college is out of funded 
aid, they will simply write off part of the cost (called a 
``discount''--an industry term for foregone tuition revenue). 
For many colleges, their discount rate is already stretched to 
the maximum and we are concerned about their bottom lines if 
further discounts become necessary because of the credit 
crisis.
                                ------                                


  RESPONSE TO WRITTEN QUESTIONS OF SENATOR TESTER FROM SARAH 
                            FLANAGAN

Q.1. Has there been real evidence of students not being able to 
access private label loans in the past few months? If so, do we 
expect that to continue in the coming months?

A.1. The greatest challenges facing students in the private 
loan market are new (higher) FICO credit score requirements and 
requirements for credit-worthy co-signers. While some students 
may be able to meet these elevated FICO requirement, students 
with little credit history may not, and low-income students may 
be unable to find credit worthy co-signers.
    Having said that, it is still too early in the loan process 
to know how widespread overall liquidity problems could be when 
borrowing actually occurs later this summer. Many problems seem 
to be regional. Colleges that are most concerned are in areas 
hard hit by the housing crisis, or in areas in which the 
economy is weak.
    Some of the concern seems to have eased since April. 
Congressional action in passing HR 5715 restored some 
confidence in the overall student loan markets. Whether the 
liquidity that legislation offers federal loans also helps the 
private student loan markets will be better know by September 
1. Also, some lenders are still waiting for the Department of 
Education's procedural announcements, due by July 1, regarding 
implementation of H.R. 5715, before committing to further 
lending this summer.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI
                      FROM SARAH FLANAGAN

Q.1. Each of you has emphasized the urgency of the credit 
environment facing students and families as they prepare for 
the upcoming academic year. Mr. Remondi, you pointed out that 
student lending is ``seasonal'' in nature.
    I would like to hear from each of you an assessment of the 
``point of no return''. When does Congress need to act, if it 
becomes necessary to legislate a Federal response to this 
issue?
    Please also consider whether a ``sunset'' should be 
attached to these measures.

A.1. As one NAICU member recently put it, ``[b]y the time our 
institutions had real documented evidence, it would be too late 
for anyone to do anything about it.'' I think Congress 
responded prudently to warning signs that students could have 
trouble accessing both Federal and private students loans. In 
passing H.R. 5715, Congress has provided a statutory structure 
to provide liquidity in the federal student loan market. If the 
remedies in the bill work smoothly it will ease the concern 
about the availability of FFELP loans. It is not clear whether 
this will have any salutary, ``spill-over'' effects on the 
availability of private student loans.
    Clearly, we will know more in the next two months. We are 
just entering the period when students at private colleges 
begin to apply for private loans for the academic year that 
begins in August or September. As another of our members 
recently noted, `students and their parents will begin looking 
at private loans after they receive the first bill in early 
July.' Certainly by early September, or the beginning of the 
school year, colleges will know the overall effects on their 
students.
    At this point, some schools are taking a wait-and-see 
attitude, while schools in other states foresee no problem 
because their state lending agencies are well capitalized and 
ready to make private loans, at least for 2008.
    H.R. 5715 seems sufficient authorization to address the 
problems of the present situation, at least on the federal side 
of the equation. It is too early to tell, if a long-term, or 
permanent solution, needs to be enacted.

Q.2. You each bring a different perspective to the question of 
how the uncertainty in the credit markets will impact access to 
student loans.
    Could you provide us with an indication of what students 
may be ``hit the hardest'' if access becomes a problem this 
summer? Lower income students? Middle-class students? First-
generation students and families? Nontraditional students?

A.2. In short, a lack of private loans could be a problem for 
any student who needs a loan and has little credit, poor 
credit, comes from a family with no credit history, or has 
parents who are unwilling or unable to borrow under the PLUS 
loan program. The lack of private loans would probably affect 
at least some students at every income level.
    However, most of our members have indicated they believe 
low- to middle/upper middle-income students would be the most 
severely affected since they are the ones most likely to have 
borrowed in the first place. Interestingly, some of our members 
think the problem is most likely to hit middle-income families 
because they tend to have less grant aid than lower-income 
students. On the other hand, low-income students are less 
likely to be able to find a credit worthy co-signer.
    Parents who refuse to borrow a PLUS loan which allows 
borrowing up to the cost of attending the institution, put 
their children in a difficult position. These students must go 
into private borrowing to make up the difference. Also at risk 
are middle-income families who have used home equity in the 
past and may be disadvantaged by the current housing market. If 
their mortgage has been foreclosed they are not eligible for a 
PLUS loan.
    Below are a set of tables that show the amount of private 
borrowing by students in various income brackets. These tables 
are based on 2003-2004 data for undergraduates. This is the 
most recent data available, but should be reflective of what 
categories of students have the greatest private loan 
dependency. I would expect that the highest income students at 
our private colleges would at this time continue to have the 
largest private loan debt, as is illustrated in the first 
table.

             TABLE 1. PRIVATE LOANS FOR FULL-TIME UNDERGRADUATE STUDENTS BY AGI AND INSTITUTION TYPE
----------------------------------------------------------------------------------------------------------------
                                                                                    Private loans
                                                                    --------------------------------------------
                                                                        4-year     Public 4-year  Private 4-year
----------------------------------------------------------------------------------------------------------------
Average Total......................................................      7,005.5         5,630.4         8,236.9
Adjusted Gross Income (AGI)
    $0-$30,000.....................................................      5,760.9         4,711.3         6,646.3
    $30,001-$75,000................................................      6,861.4         5,649.2         8,092.6
    $75,001 or more................................................      8,012.6         6,247.4         9,445.4
----------------------------------------------------------------------------------------------------------------


     TABLE 2. UNDERGRADUATE PRIVATE LOANS BY AGI AND ATTENDANCE STATUS
------------------------------------------------------------------------
                                                      Private loans
                                               -------------------------
                                                 Full-time    Part-time
------------------------------------------------------------------------
Average Total.................................      6,283.7      4,686.7
Adjusted Gross Income (AGI)
    $0-$30,000................................      5,405.1      4,380.2
    $30,001-$75,000...........................      6,087.7      5,040.4
    $75,001 or more...........................      7,457.8      4,750.6
------------------------------------------------------------------------


    TABLE 3. UNDERGRADUATE PRIVATE LOANS BY AGI AND DEPENDENCY STATUS
------------------------------------------------------------------------
                                                   Private loans
                                         -------------------------------
                                             Dependent      Independent
------------------------------------------------------------------------
Average Total...........................         6,348.9         5,040.3
Adjusted Gross Income (AGI)
    $0-$30,000..........................         5,151.2         5,098.3
    $30,001-$75,000.....................         6,045.3         5,086.5
    $75,001 or more.....................         7,453.3        4,048.2
------------------------------------------------------------------------
Source for Tables 1-3: U.S. Department of Education, National Center for
  Education Statistics (NCES), 2003-04 National Postsecondary Student
  Aid Study (NPSAS:04).


Q.3. We have asked institutions to be entrepreneurial in 
finding ways to partner with private sector in reducing costs 
to students and families.
    At the same time, there are those who are suspicious of 
preferential relationships, particularly those between 
universities and financial institutions.
    What guidance would you give as we attempt to draw a line 
between appropriate and inappropriate conduct of institutions 
of higher education?

A.3. Both colleges and the federal government have been 
concerned about the area of appropriate activity between 
colleges and businesses with which they deal. The staff at 
NAICU have worked with the staff of the House Education and 
Labor Committee and the Senate HELP Committee to craft an 
agreeable and effective line between acceptable and 
unacceptable behavior. We feel that the current sunshine 
provisions in the draft HEA bill are headed toward that 
balance. The regulations that the Department of Education 
published in November, 2007 also aim to control excess while 
allowing essential training and business activities. No doubt 
both the HEA and the regulations may need refinements once they 
have been in effect long enough to see where changes are 
needed.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY FROM MARK 
                           KANTROWITZ

Q.1. It appears that with the tightening of credit standards, 
low-income students will be disproportionately affected. Can 
you explain the progression, how this will play out in May or 
July and later in the year when tuition payments are due? Which 
students, families, and schools will be impacted first, and 
what will their options be if they are unable to obtain federal 
student loans? How will the education sector be affected and 
will they be doing anything to assist low-income students and 
others who are denied loans so that the stream of students 
matriculating to their institutions is not interrupted?

A.1. Students will be affected in two main ways: initial denial 
when applying for a private student loan, and subsequent stress 
when lenders who have exited in the interim refuse to disburse 
funds. Some lenders are being careful to avoid over-committing 
their current liquidity. Others are not, and may run out of the 
funds needed to fully disburse their originations. The affected 
borrowers will then need to scramble to find replacement 
funding.
    Borrowers who are denied a PLUS loan because of a 
foreclosure in the last five years are unlikely to qualify for 
a private student loan. They are also unlikely to qualify for a 
home equity loan or line of credit, for obvious reasons. They 
will either have to rely on credit cards, transfer to a less 
expensive college, or drop out of college.
    The greatest impact will be felt by students with bad or 
marginal credit or a recent foreclosure, low and moderate 
income students, first generation students, nontraditional 
students, and students enrolled in 1 or 2 year programs at for-
profit and community colleges.
    For-profit colleges with large balance sheets are exploring 
whether they can establish their own private student loans. 
This will, however, have a significant negative impact on their 
cash flow unless they shorten the pipeline by selling the loan 
assets a year or two after the borrowers have graduated (when 
their credit scores have improved). The elite colleges with 
large endowments have established financial aid policies that 
eliminate loans from the financial aid packages of low income 
students. The colleges in the middle, however, will be in a 
much more difficult position, as they do not have the 
endowments needed to cushion a significant disruption to 
student loan funding. Some of the smaller colleges may be at 
risk of closure.
    If Congress fails to act, lenders representing an 
additional 20% to 25% of FFELP Stafford and PLUS loan volume 
will likely exit by early fall, including the largest non-bank 
lenders.

Q.2. Secretary Spellings is considering exercising her 
authority to invoke an emergency safety net that would make the 
guarantors of federally backed loans into lenders of last 
resort. It seems that the experimental nature of such a program 
would make it slow and cumbersome. How will it affect the 
students that are applying for financial aid to go to school 
this fall, if at all?

A.2. The lender-of-last-resort program has never been tested. 
It might work flawlessly or it might not. Aside from verbal 
assurances that it is ready, there is no hard evidence 
concerning the likely performance of the system. As with any 
new program there is the possibility of disruption as any kinks 
are worked out of the system. It does not take advantage of 
existing mechanisms in the FFEL program. In addition, the 
lender-of-last-resort program is a reactive solution that can 
only be invoked after a crisis has already occurred, yielding 
the possibility of disruption due to delayed implementation. It 
does nothing to avert a crisis and does not address the 
liquidity constraints impacting education lenders. If there is 
no thawing of the capital markets the lender-of-last-resort 
program is likely to remain in place permanently.

Q.3. As we consider different ways to address the state of 
these fiscal markets there are a number of proposals, and they 
all deserve consideration. But I would like to make sure we 
fully understand this issue. To the extent that you can tell us 
today, as opposed to the future when we will know more, how 
much is the current market turmoil temporary, and how much can 
we expect that in some ways these markets will be changed 
forever? I ask because, as we consider solutions, we need to be 
mindful of whether we would be creating permanent Federal 
interventions when we might only intend temporary ones.

A.3. Investors in all securitizations, not just student loan 
securitizations, have become risk averse. They are unlikely to 
start returning to the capital markets until the subprime 
mortgage credit crisis has run its course and foreclosure rates 
start declining. Foreclosure rates are expected to start 
peaking soon. However, even if the subprime mortgage credit 
crisis were to disappear tomorrow and investor interest were to 
return to the levels in early 2007, there is a large backlog of 
loans waiting for securitization. It will take at least a year 
and possibly several years for this pipeline to drain. In 
addition, investor lack of interest in subprime borrowers is 
likely to be permanent. This means that private student loans 
are unlikely to start lending to subprime borrowers except to 
the extent that they are able to identify good prospects among 
the subprime borrowers (e.g., borrowers who are close to 
graduation in an employable degree program from a school with a 
good reputation and high job placement rate).
    To the extent that the proposed interventions reduce 
government costs or increase government revenue, however, 
permanent interventions aren't necessarily problematic for the 
federal government.

Q.4. There are proposals to allow Federal Home Loan Banks to 
take some of these securitized loans as collateral and thereby 
inject some liquidity into the market. Congressman Kanjorski 
and Senator Kerry have proposals to do that. How does this 
compare with the other proposals? Do you think the Home Loan 
Banks would use that authority? And, would such a proposal 
present any dangers for the Home Loan Banking system at a time 
when they are already doing so much?

A.4. Allowing the Federal Home Loan Banks and/or the Federal 
Financing Bank to invest in student loans or student loan 
securities and to advance funds for making education loans 
would be an effective tool for injecting liquidity into the 
market. However, the Federal Home Loan Banks' primary focus is 
on mortgages, and so they may be less willing to invest surplus 
assets in providing liquidity to FFELP lenders. Such an 
expansion may be seen as ``mission creep'' and a distraction 
from the current mortgage credit crisis (as opposed to the 
potential student loan credit crisis). There is already some 
precedent for using the Federal Financing Bank to inject 
liquidity into the FFEL program (e.g., section 439(h) of the 
Higher Education Act provided such a facility when Sallie Mae 
was a GSE). Such an approach might be more stable and 
streamlined than relying on the Federal Home Loan Banks.
                                ------                                


   RESPONSE TO WRITTEN QUESTIONS OF SENATOR TESTER FROM MARK 
                           KANTROWITZ

Q.1. Will allowing the Federal Home Loan Banks (FHLBs) to 
invest in student loan related securities, as some have argued 
for, provide adequate liquidity into the market?

A.1. I do not have any data concerning the total ``surplus'' 
assets of the Federal Home Loan Banks, nor their willingness to 
invest these assets in providing liquidity to FFELP lenders. 
According to the 2007 Combined Financial Report for the Federal 
Home Loan Banks, total assets as of 12/31/07 were $1.275 
trillion, of which $299 billion was in investments. The FFEL 
program will origination approximately $72 billion in Stafford 
and PLUS loans during the 2008-2009 academic year, or about a 
quarter of the FHLB investments.

Q.2. Are all of the FHLBs able to adequately handle the new 
line of business as they are grappling with existing capital 
and liquidity concerns in other areas?

A.2. Allowing the FHLBs to invest in FFELP loans and FFELP 
securitizations (as well as advances for the origination of 
FFELP loans) would expand the FHLB mission beyond the mortgage 
industry. They do not currently have experience in valuing 
federally-guaranteed student loans. Their attention is also 
focused on the present crisis in the mortgage industry, and may 
view the problems in the FFELP industry as a lower priority 
distraction. On the other hand, there is precedent for having 
the Federal Financing Bank (FFB) provide liquidity to education 
lenders, as they did so when Sallie Mae was a GSE. See, for 
example, section 439(h) of the Higher Education Act of 1965. 
The FFB can also borrow from the U.S. Treasury.

Q.3. Will permitting the FHLBs to provide secured advances to 
its members to originate student loans or finance student loan-
related securities create increased risk for smaller community 
banks?

A.3. Federally education loans are already guaranteed against 
borrower default by the federal government. The added risk of 
investing in these loans is minimal and consists of a small 
amount of risk sharing and a kind of prepayment risk when the 
federal government pays a default claim. The first type of risk 
stems from the 99% guarantee for lenders who are exceptional 
performers and 97% guarantee for lenders who are not 
exceptional performers. Both will be replaced with a 95% 
guarantee starting in 2012. The second type of risk reflects 
that a default claim pays only the outstanding principal and 
accrued but unpaid interest, and not future interest which 
would have been collected after the default had the borrower 
not defaulted.
    In the event of issuer default, the newly enacted Direct 
Loan secondary market provisions of the Ensuring Continued 
Access to Loans Act of 2008 (P.L. 110-227) would potentially 
permit the U.S. Department of Education to purchase the loans 
from the FHLB, returning the capital associated with the 
student loan trusts.
                                ------                                


         RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI
                      FROM MARK KANTROWITZ

Q.1. Each of you has emphasized the urgency of the credit 
environment facing students and families as they prepare for 
the upcoming academic year. Mr. Remondi, you pointed out that 
student lending is ``seasonal'' in nature.
    I would like to hear from each of you an assessment of the 
``point of no return''. When does Congress need to act, if it 
becomes necessary to legislate a Federal response to this 
issue?
    Please also consider whether a ``sunset'' should be 
attached to these measures.

A.1. As of May 12, 2008, lenders representing 14.1% of FY07 
FFELP Stafford and PLUS loan origination volume have suspended 
participation in those loan programs (17.7% if one counts 
school-as-lender schools), and 79.3% of FY07 FFELP 
Consolidation loan volume. The consolidation loan volume is not 
a concern, not even if 100% of the volume evaporates, as 
borrowers can currently obtain a Federal Direct Consolidation 
Loan at loanconsolidation.ed.gov. The Stafford and PLUS loan 
volume, however, is already a concern at schools with shorter 1 
and 2 year programs, such as for-profit and community colleges, 
and at schools with a cohort default rate of 10% or more. 
Colleges face a significant administrative burden when lenders 
representing 25% to 50% of its loan volume suspend 
participation. In addition, when lenders representing a third 
of the loan volume suspend their participation, the remaining 
lenders are unlikely to be willing or able to absorb any 
further increases in marketshare.
    There is a need for a sunset provision, as otherwise it 
might be difficult to wean the FFELP lenders off of a 
convenient source of low-cost capital. Rep. Kanjorski's bill, 
the Student Loan Access Act of 2008 (H.R. 5914), includes an 
adequate sunset provision. In addition, the cost of funds 
associated with the liquidity should be set high enough that 
education lenders will return to the capital markets as a 
source of funding when the cost of funding returns to rational 
levels, but low enough to ensure continued participation (e.g., 
between CP + 40 and CP + 80).

Q.2. You each bring a different perspective to the question of 
how the uncertainty in the credit markets will impact access to 
student loans.
    Could you provide us with an indication of what students 
may be ``hit the hardest'' if access becomes a problem this 
summer? Lower income students? Middle-class students? First-
generation students and families? Nontraditional students?

A.2. Students who have been affected by a foreclosure in the 
last five years, or who have bad or marginal credit, will be 
the ones most likely to have difficulty obtaining federal PLUS 
and private student loans. Students who are enrolled at 1 and 2 
year institutions are also likely to have difficulty obtaining 
education loans, as smaller aggregate loan balances per 
borrower are less profitable for education lenders. The burden 
will largely be felt by low and moderate income students, 
first-generation students, and nontraditional students, as they 
represent a disproportionate share of students enrolling at 
these institutions. Even at schools with very little subprime 
borrower exposure, approval rates on private loans have 
decreased by 10% to 25%. Already students enrolled at foreign 
non-Title-IV institutions, especially foreign medical schools, 
are having trouble finding private student loans. This may 
result in a doctor and nurse shortage several years from now. 
In addition, private student loans are likely to increase their 
interest rates by 1.0% to 1.5% or more, affecting all but 
students with the highest credit scores.

Q.3. You emphasize in your testimony the need to restore 
investor confidence. Yet here we are, talking about this issue 
as though the crisis is at hand. There is a difference between 
being prepared, and creating a self-fulfilling prophecy.
    Emergency Congressional action sends a signal. How do we 
walk the fine line between over reaction, and finding ourselves 
unprepared?

A.3. FinAid has been careful to use language such as ``not yet 
a crisis'', ``cause for concern'' and ``need proactive 
solutions to prevent a crisis'' in order to avoid creating a 
self-fulfilling prophecy. If Congress enacts legislation that 
injects liquidity into FFELP, it will be seen as a vote of 
confidence. To some extent the current situation is a market 
overreaction and a crisis of confidence by investors in what is 
still fundamentally good quality paper. It will also restore 
the balance between supply and demand for student loan ABS, 
helping to drive down the cost of funds. It also has the 
potential to provide current investors in student loan ARS with 
an exit strategy, which might cause other investors to return, 
jump-starting the auction-rate securitization market for 
student loans.

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