Last Friday Under Secretary of Education Sara Martinez Tucker outlined in a letter to guarantors the fees they can expect to receive from the Department for issuing Lender of Last Resort (LLR) loans when using federal funds. The Higher Education Act authorizes the Department to provide guarantors with Federal Advances for LLR loans if the guarantor is unable to find a lender willing to make an LLR loan or make the loans out of its own funds.
These fees are paid in lieu of statutorily set fees that would normally be paid to lenders or guarantors making LLR loans out of their own funds. The Department will pay guarantors that use Federal Advances (i.e., funds coming directly from the Department) $20 for each loan originated and $3.50 for each PLUS loan credit check performed.
The origination fee was established using a market-based method, according to Brett Lief, president of the National Council of Higher Education Loan Programs (NCHELP), a Washington D.C. -based nonprofit that advocates on behalf of guaranty agencies. Lief says guarantors conducted a survey of the major loan servicers to determine how much it would cost to originate loans under LLR. The $20 amount is close to their findings.
"But we came to that $20 amount using a certain set of assumptions about what services would need to be met to originate loans under LLR," says Lief, who is concerned that the Department hasn't yet confirmed or explained what those origination requirements will be. "We won't really know whether the $20 accurately reflects origination costs until the Department details origination requirements that guarantors will need to meet."
The lending community is also concerned about the Department's decision to service all LLR loans made with Federal Advances immediately upon disbursement. The Department, not the guaranty agencies, will bear the full cost of servicing those loans, and LLR loans made with Federal Advances will be assigned to the Department after origination and disbursement.
"Guarantors will get the money, originate the loan, disburse the loan, and then it goes directly to the Department's servicer," explains Lief. "I am concerned the Department is making this a federally centric approach as opposed to a student approach. We recognized that these are federal assets, assignable to the Secretary when requested, however, there is a responsibility to the borrowers and schools to have a transparent process."
Lief's concerns focus on the Department's ability to perform default prevention initiatives performed by guarantors and whether the Department can handle the influx of servicing requests made by schools. Lief estimates that 25 percent of all FFELP loans require adjustments (e.g., cancellations, increases, decreases) after disbursement. Under LLR those adjustments will all be handled by a federal contractor. Who the contractor will be, whether they will use CommonLine, and what access guarantors will have to view those loans are all unknown at the moment. (CommonLine is a standardized format and delivery process for the exchange of loan data between schools and their federal and private student loan service providers.)
NCHELP had recommended to the Department an alternative LLR method that would allow LLR loans made with Federal Advances to be serviced in the traditional manner by FFEL servicers, which would make the transition smoother for students and schools, according to Lief.
The requirements outlined in the Department's letter only apply to guarantors using Federal Advances, which will include most guarantors according to Lief. NCHELP estimates that collectively, guarantors identified $750 million dollars in lender or guaranty funds to originate loans under LLR and that another $10 to $12 billion in Federal Advances could be needed to meet LLR demand.
"Unless the Department can implement a very robust liquidity injector in the next 10 days, I think LLR will be larger than we originally anticipated," says Lief. "We have not yet seen any additional plans to provide liquidity to lenders. This is vital in order to ensure that student have a reliable source of funds this upcoming September."
By Justin Draeger
NASFAA Associate Director for Communications
Posted 05/19/08 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.
