Since 1966, the federal government has provided guarantees and subsidies to approved private lenders or state government entities that make student loans. The aim: making higher education more affordable. Because college graduates' enhanced human capital is generally not viewed as collateral, without federal subsidies and guarantees, lenders would probably charge interest rates more in line with other unsecured loans, such as credit card debt, that could push the financial costs of higher education beyond the reach of many students. Recent changes in the federally guaranteed loan programs, outlined below, have raised concerns that the supply of student loans could be disrupted for the 2008-2009 academic year, prompting Congress and the Administration to take steps to forestall possible disruptions that might affect students' education plans. Overview of the Student Loan Market Two major student loan programs exist federally: the Federal Family Education Loan (FFEL) program and the William D. Ford Federal Direct Loan (FDLP) program. These programs provide loans to undergraduate, graduate and professional students, and the parents of undergraduate dependent students, to help finance the costs of postsecondary education. The FFEL program is the largest student loan program. Subsidized and "unsubsidized" FFEL Stafford loans are made to students. FFEL PLUS loans are made to parents of students, as well as to graduate and professional students. Loan volumes for the PLUS program are much smaller than FFEL loan volumes. The federal government absorbs interest costs of students in school or in deferment for subsidized loans, which are available to students meeting certain financial need tests. For "unsubsidized" loans, which are not need-based, interest costs that accrue while a student attends school or is in deferment are either paid by the borrower or folded into the loan itself. The William D. Ford Federal Direct Loan Program, created in 1993, allows students enrolled in participating institutions of higher education to obtain Stafford and PLUS loans directly from the federal government. Loan Volumes Federal student loans (FFEL, FDLP, and Perkins) are projected to provide $74 billion of the estimated $258 billion cost of higher education in the 2007-2008 academic year. In recent years, FFEL loan volume has been about four times greater than FDLP loan volume. Private student loans are projected to provide another $18 billion of that total. Contributions from students and their parents are projected to cover $71 billion, with scholarships and grants covering the remaining $95 billion. Figure 1 shows Stafford loan volumes for undergraduate students attending four-year or two-year public institutions, and Figure 2 shows the same data for students attending four-year or two-year private institutions. Total Stafford loan volumes for both the FDLP and FFEL programs are much higher for four-year colleges and universities than for two-year institutions, and are substantially higher than loan volumes for proprietary institutions. In particular, student loan volumes for two-year private institutions are very low compared to volumes for four-year private institutions. Direct Loans Schools, or their subunits, choose to participate in the FFEL program or the FDLP program. Thus, the FDLP program could provide loans in the event that private FFEL lending was insufficient to satisfy student loan demand, if school financial aid officials made participation decisions that would allow that to occur. Some have expressed concern that a rapid increase in FDLP loans, which might occur were a significant proportion of FFEL lenders to exit the market, would present significant administrative challenges to the Department of Education. On May 21, 2008, the Education Secretary, Margaret Spellings, sent a letter to student lenders stating that the department had the ability, if need be, to double the volume of FDLP loans. Figure 1. Stafford Loans for Students in Public Colleges & Universities, 1987-2006 (in billions of dollars)Source: Data provided by Department of Education.Note: Totals for 50 states and D.C. Foreign loans excluded. Figure 2. Stafford Loans for Students in Private Colleges & Universities, 1987-2006 (in billions of dollars)Source: Data provided by Department of Education.Note: Totals for 50 states and D.C. Foreign loans excluded. The College Cost Reduction and Access Act The College Cost Reduction and Access Act ( P.L. 110-84 ), enacted in September 2007, cut interest rate subsidies to lenders and increased the proportion of default costs borne by lenders. Some have argued that reductions in Federal Family Education Loan (FFEL) subsidies, as well other changes in the FFEL program, would lead some student loan providers to exit the market. Lender Withdrawal Announcements In early 2008, some student lenders announced plans to restrict loans in response to tightening credit conditions and cuts in federal subsidies put in place by the College Cost Reduction and Access Act. In February 2008, the Pennsylvania Higher Education Assistance Program (PHEAA) announced they would suspend making federally guaranteed loans. Since then, many other lenders announced plans to suspend participation in federally guaranteed student loan programs. According to Finaid.org, as of July 14, 2008, 96 lenders had indicated that they would suspend originating FFEL loans and an additional 24 indicated that they would only suspend originating consolidation loans. In addition, 27 lenders announced that they would suspend new private loans. In total, as of July 14, 2008, 125 lenders had indicated that they would suspend participation in private loans and some part of the FFEL program. The Secretary of Education, in a March 4, 2008, letter to financial aid professionals, requested that financial aid offices relay information on lenders' intentions to curtail student loans to the U.S. Department of Education. Some analysts maintain that difficulties in the market for student loans stem from wider problems in credit markets or from student loan industry attempts to create pressure to reverse subsidy cuts. Further, some student loan providers have encountered financial problems not directly related to the student loan market. For example, Sallie Mae (SLM Corp.) took a $1.5 billion write-down stemming from financial positions it took that would have increased in value had its stock price risen. Some observers contend that student lenders have overstated their recent troubles and that loans remain available through the Federal Direct Lending Program (FDLP). The following sections describe key provisions of the FFEL loan program and outline changes made by the College Cost Reduction and Access Act. Although reductions in interest rate subsidies for FFEL lenders have attracted the most attention, other legislative changes may also have important effects on the student loan market. Lender Subsidy Formulae The formulae determining interest rates that student borrowers pay and the yields (including certain subsidies) received by FFEL lenders for various types of federally guaranteed loans are set by legislation. These formulae have been changed many times since 1981. Other changes in program details, such as higher origination fees paid to the federal government, have reduced lenders' profit rates. On the other hand, new information and communication technologies have sharply increased productivity in the banking industry, reducing servicing costs for student loans, and other things equal, increasing lender profits. Lenders participating in federal guaranteed loan programs receive subsidy payments that, according to language of the Higher Education Act, ensure holders of FFEL loans receive at least "equitable" returns, compared to other financial opportunities available to those lenders. Under current law, these lenders receive a yield equal to a short-term commercial paper (CP) rate plus a legislatively determined add-on, which can vary by type of loan and by type of lender. When borrower interest rates fall below the sum of the CP rate and the add-on, the government makes Special Allowance Payments (SAP) to lenders. Special Allowance Payments are determined quarterly. During some periods in the past, when the fixed borrower rate exceeded the sum of the SAP add-on and the base interest rate, lenders would collect the difference, known as "floor income" or "excess interest." The Higher Education Reconciliation Act of 2005 (HERA; P.L. 109-171 ; Sec. 8006(b)(1)) changed Stafford student loan rules so that floor income on loans disbursed on or after April 1, 2006, is now returned (i.e., rebated) to the federal government. The College Cost Reduction and Access Act ( P.L. 110-84 ) reduced lender subsidies in several ways. For new loans originated after October 1, 2007, lender origination fees increased from 0.5% to 1% of loan value. SAP add-on rates for Stafford loans and consolidation loans were cut by 0.55% (55 basis points) for for-profit lenders and by 0.40% (40 basis points) for not-for-profit lenders. SAP add-on rates for PLUS loans were reduced by 85 basis points for for-profit lenders and by 70 basis points for not-for-profit lenders. Default Costs The act also increased the proportion of default costs borne by lenders. For loans originated after October 1, 2012, lender insurance rates will be cut from 97% to 95%. As of October 1, 2007, the "exceptional performer" status enjoyed by lenders that met certain federal regulatory requirements, which gave those lenders access to faster processing of default paperwork and a 99% insurance rate, was eliminated. On the other hand, average default rates have decreased sharply since the early 1990s, thus generally reducing the financial risks to lenders of defaults. The total default rate for FFEL and FDLP loans for the FY2005 cohort (calculated in July 2007) was 4.6%, well below the peak default rate of 22.4% reached by the FY1990 cohort. FY2005 cohort default rates for four-year institutions were even lower, averaging 3.0% for public four-year institutions and 2.3% for their private counterparts.