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50–397 2010

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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(II) 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Pennsylvania 

JON TESTER, Montana 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

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 


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(III) 

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 


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(1) 

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 mortgagebacked 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. 


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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 


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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 lowcost 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 


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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 


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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? 


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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 repVerDate Nov 24 2008 02:04 Mar 20, 2010 Jkt 050397 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 E:\HR\OC\A397.XXX A397

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resented 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 supVerDate Nov 24 2008 02:04 Mar 20, 2010 Jkt 050397 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 E:\HR\OC\A397.XXX A397

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porting 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 assetbacked 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. 


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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. 


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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 publicpartnership 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 


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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, 


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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. 


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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 seriVerDate Nov 24 2008 02:04 Mar 20, 2010 Jkt 050397 PO 00000 Frm 00017 Fmt 6633 Sfmt 6602 E:\HR\OC\A397.XXX A397

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ously 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 


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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 ecoVerDate Nov 24 2008 02:04 Mar 20, 2010 Jkt 050397 PO 00000 Frm 00019 Fmt 6633 Sfmt 6602 E:\HR\OC\A397.XXX A397

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nomic 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 


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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 aftertax 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. 


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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 assetbacked 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 


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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. 


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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. 


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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 


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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 nondepository 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 guaranVerDate Nov 24 2008 02:04 Mar 20, 2010 Jkt 050397 PO 00000 Frm 00026 Fmt 6633 Sfmt 6602 E:\HR\OC\A397.XXX A397

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teed 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. 


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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. 


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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—— 


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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—— 


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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 firstgeneration 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 


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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 

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cially 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 


dcolon on DSK2BSOYB1PROD with HEARING
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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 assetbacked 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 cumVerDate Nov 24 2008 02:04 Mar 20, 2010 Jkt 050397 PO 00000 Frm 00034 Fmt 6633 Sfmt 6602 E:\HR\OC\A397.XXX A397

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bersome, 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? 


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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, 


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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 


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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 


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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 


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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? 


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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. 


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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 


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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 lowincome 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 


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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. 


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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—— 


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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:] 


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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. 


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122 

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 


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123 

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.’’ 


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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 


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125 

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 assetbacked 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 


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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. 


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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? 


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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, lowincome 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 lowincome 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 


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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. 


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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, ‘‘spillover’’ 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 


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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 lowto 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 


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TABLE 1. PRIVATE LOANS FOR FULL-TIME UNDERGRADUATE STUDENTS BY AGI AND INSTITUTION 

TYPE—Continued 

Private loans 

4-year Public 4-year Private 4-year 

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. 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR CASEY 

FROM MARK KANTROWITZ 

Q.1. It appears that with the tightening of credit standards, lowincome 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 


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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 


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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 federallyguaranteed 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 


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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? 


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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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