Plan will keep loans flowing to students

The Education Department will spend as much as $6.5 billion to buy federally guaranteed loans offered by private lenders to ensure students will have aid during the credit crisis.

The department will spend up to $500 million a week through February to buy Federal Family Education Loan Program loans from the 2007-2008 school year. After that, government support begins for a so-called conduit loan program, according to a statement posted yesterday on the department's website.

The plan will minimize potential disruption in student lending until the conduit loan program begins, the department said. The purchases will help free lenders to make remaining disbursements for this academic year, an industry official said.

The global financial crisis has extended beyond banks, and the markets for student loans, auto loans, and credit cards are currently in distress, Neel Kashkari, the Treasury Departments assistant secretary in charge of a $700 billion rescue plan for banks, said last week. Education Secretary Margaret Spellings said in the statement that she was using authority granted by Congress.

The action will protect students and their families and ensure lenders continue to disburse student loans, she said.

About $55 billion worth of Family Federal Education Loan Program loans were disbursed during the 2007-2008 academic year, US Education Undersecretary Sara Martinez Tucker said. Of those, as much as $35 billion in loans made as part of the Stafford and the Federal PLUS programs are eligible for consideration under the short-term plan, she said.

Loans not eligible for the short-term measure include consolidated loans, those more than 210 days in arrears, loans already securitized, and loans with borrower benefits such as cash rebates, Martinez Tucker said.

The plan will give lenders the liquidity to meet any remaining disbursements on loans for the 2008-2009 academic year, said Brett Lief, president of National Council of Higher Education Loan Programs.