1. Student Loan “Credit Crunch” Legislation
H.R. 5715
(Ensuring Continued Access to Student Loans Act of 2008)

2. H. R. 5715
Introduced on April 8, 2008
Marked up in House Education and Labor Committee on April 9, 2008 (approved by voice vote)
Passed the House by a vote of on April 17, 2008
Amended and passed by the Senate by unanimous consent on April 30, 2008
Passed by the House (as amended by the Senate) on May 1, 2008 under suspension of the rules by a vote of
Signed by President Bush on May 7, 2008 (P.L. 110-)

3. Effective Date
No general effective date provided in the legislation – that means that, unless provided otherwise in a section, the bill is effective as of date of enactment

4. Master Calendar and Neg Reg
Master Calendar (sec. 482) and Negotiated Rulemaking (sec. 492) are not applicable to the loan provisions of the Act (sections 2-9), or the regulations implementing them
Master Calendar and Neg Reg are applicable to the changes to Academic Competitiveness Grants (ACG) in section 10 of the bill (big mistake according to ED!)

5. Increases Unsub Loan Limits
Annual unsub loan limits for undergrad students increased by $2,000
Aggregate loan limits increased for undergrads
$31,000 for dependent undergrads
$57,500 for independent undergrads
Original bill increased annual limits for grad students as well but manager’s amendment on 4/17 rolls back the increase (annual limit remains $12,000, as enacted in HERA)
Unsub loan limits for graduate student enrolled in coursework specified in 484(b)(3)(B) and (4)(B) (“courses necessary for enrollment”) remains at $7,000 ($2,000 increase enacted in HERA)
Aggregate loan limits for grad students adjusted to reflect increases (Graduate loan limits were not increased in HERA)
Applies to loans first disbursed on or after July 1, 2008

6. Grace Period for Parent PLUS Loans
With parent borrower agreement, repayment of principal commences 6 months after student for whom the loan was made ceases to carry at least one-half normal full-time academic workload
Conforming change to section 428(b)(7)(C) – deleted reference to 428B (“In the case of a loan made under section 428A or 428C, the repayment period shall begin on the day the loan is disbursed….”)
Conforming change made to capitalization rules
Applies to new loans first disbursed on or after July 1, 2008

7. Extenuating Circumstances
The lender may determine that “extenuating circumstances” exist under the regs in connection with an applicant’s adverse credit history if, during the period beginning 1/1/2007 and ending 12/31/2009, the applicant is or has been not more than 180 days delinquent on a mortgage loan or medical bills during such period AND is or has been less than 90 days delinquent on the repayment of any other debt during such period
Mortgage loan defined as extension of credit secured by the borrower’s primary residence
Nothing in this subparagraph shall be construed to limit a lender’s authority under the regulations to determine that extenuating circumstances exist

8. Lender of Last Resort
LLR loans available to all students and parents unable to obtain loans (not just to students eligible for sub loans)
Exception for consolidation loans
LLR loans may not have interest rates, origination or default fees, or other terms and conditions that are more favorable to the borrower than the MAXIMUM interest rates, fees, terms and conditions applicable under this part
“2 rejections” language in 428(j)(2)(B) covers students and parents (except for consolidation loans), but language prohibiting “additional eligibility requirements or requests for additional information” was not expanded to cover parents

9. Institution-wide LLR
Upon the request of the institution and pursuant to standards developed by the Sec’y of Ed, the Sec’y shall designate entire schools as participants in LLR
If a school is so designated, then the GA designated for the State where the school is located shall make loans, in the same manner as such loans are made under para. (1), to students and parent borrowers at the school
Paragraph (1) provides that “In each State, the GA…shall make loans directly, or through an agreement with an eligible lender or lenders, to students….”
All students and parents at a designated school would be entitled to receive LLR loans, regardless of whether they are otherwise unable to obtain a loan (other than a consolidation loan)
Sec’y may require a school to demonstrate that,
Despite due diligence on its part, the school is unable to find lenders to make loans to a significant number of its students
School has met a minimum threshold (as determined by the Sec’y) for number or percentage of students who have received rejections from lenders for loans under this part
Any other standards and guidelines the Sec’y determines to be appropriate
Sec’y’s authority to designate schools for LLR participation expires on 6/30/2009
Eligibility for school-wide designation also expires on 6/30/2009 (After that date revert to old LLR rules – borrower by borrower)

10. Inducements
Each GA or lender that serves as an LLR is subject to the prohibitions on inducements applicable to GAs (sec. 428(b)(3)) and lenders (sec. 435(d)(5))
Each GA or lender that serves as an LLR shall not advertise, market or otherwise promote LLR loans (but GAs allowed to ensure that info about LLR loans made available to schools pursuant to sec. 428(j)(2)(C))
Within 90 days after date of enactment Sec’y required to review (and as necessary revise) inducements regulations applicable to GAs because of LLR provisions in this bill
Report to authorizing committees within 180 days of date of enactment

11. Dissemination and Reporting
Sec’y shall broadly disseminate information regarding availability of LLR loans
During the period 7/1/2008 through 6/30/2010, Sec’y shall provide to the authorizing committees and make available to the public –
Copies of new or revised plans or agreements made by GAs or the Sec’y relating to LLR authority
Quarterly reports on number and amounts of LLR loans originated or approved by each GA and eligible lender, and any related payments by ED, GAs, and lenders
Separate reports required for institution-wide LLR loans
Budget estimate of the costs to the Federal Government (including subsidy and administrative costs) for each $100 loaned for LLR loans as opposed to the cost of comparable loans under parts B and D
Disaggregated by type of loan AND by part for B and D loans
Loans made between date of enactment and 6/30/2009
Beginning 7/1/2010 Sec’y shall provide to the authorizing committees and make available to the public –
Annual reports on number and amounts of LLR loans originated or approved by each GA and eligible lender, and any related payments by ED, GAs, and lenders
Effective date of enactment

12. Mandatory Advances to GAs
Clarifies that the Sec’y of Ed is authorized to advance Federal funds to GAs if they don’t have sufficient capital
Clarifies the existing authorization of appropriations to make such advances
Effective as of date of enactment

13. Temporary Authority for ED to Purchase FFELP Loans
New section 459A added to part D
Upon a determination by the Sec’y that there is inadequate availability of capital to meet the demand for loans, the Sec’y of Ed, in consultation with Treasury, is authorized to purchase loans made under 428, 428B, and 428H or enter into forward commitments to purchase such loans from FFELP lenders
Can be the result of inadequate liquidity or for other reasons
Not applicable to consolidation loans
Loans first disbursed on or after 10/1/2003 and before 7/1/2009
Must consult with Sec’y of Treasury and Director of OMB regarding terms – joint determination that purchases are in the best interest of the US
No purchase under this section shall result in any net cost to the Federal Government, including the cost of servicing the loans purchased
Congressional staff turned down suggestions to make this an amendment to part B.
The devil is in the detail and there are huge implications for lenders and servicers based on how ED, Treasury and OMB interpret this provision – authority, not a mandate
ISSUES that ED is wrestling with –
Authority is to purchase “loans” – does that mean entire loan or could ED purchase an interest in a loan?
No explicit authority to sell loans once purchased (ED asked for it, but it wasn’t given)

14. Temporary Authority for ED to Purchase FFELP Loans (cont’)
Joint Federal Register Notice by ED, Treasury and OMB prior to the purchase of any loans under this section
Establish terms and conditions governing purchases
Outline of methodology and factors that ED, Treasury and OMB will jointly consider in evaluating purchase price
Describe how the use of such methodology and factors will ensure that loan purchases do not result in any net cost to the Federal Government (including the cost of servicing the loans purchased)
Lenders must use proceeds to ensure their continued participation in FFELP AND to originate new Federal loans
The Sec’y may (if agreed by the selling lender) contract with such lender for the servicing of the loans purchased, provided
Cost of servicing doesn’t exceed cost the Federal Gov’t would otherwise incur for the servicing of loans purchased under paragraph (a) – i.e., net cost to the Federal Government test
Servicing arrangement must be in the best interest of the borrowers whose loans are purchased
Sec’y’s authority to purchase loans expires on July 1, 2009
Sec’y’s contracting authority under sec. 456(b) expanded to include loans purchased

15. Sense of Congress
Sense of Congress that FFB, FHLBs, and Federal Reserve should consult with Sec’ies of Education and Treasury and should consider using their available authorities in a timely manner, if needed, to assist in ensuring continued student loan access for AY , and, if needed, in the subsequent AY, in a manner that results in no increased costs to taxpayers
Any such action should not limit or delay Sec’y’s authority to operate LLR program or to purchase FFELP loans as provided elsewhere in this Act

16. GAO Study
GAO to conduct study regarding the effect of the loan limit increases contained in this bill and in the Deficit Reduction Act of 2005 on
Tuition, fees, room and board
Private loan borrowing
Study to last five years and cover each major sector of schools
Interim report to authorizing committees after one year, including initial results of study
Additional follow-up with the authorizing committees after 3rd and 5th years

17. Academic Competitiveness Grants (ACG)
Changes made to ACG provisions to expand eligibility
“year” instead of “academic year”
Strike “full-time” requirement
“award year” instead of “academic year”
Added 5th year eligibility
No grants for credits prior to HERA
Only one grant per year of study
Effective January 1, 2009

18. Other Bills
H.R Emergency Student Loan Market Liquidity Act introduced on 4/8/2008 by Rep. Kanjorski (D-PA)
Bill would permit the Federal Home Loan Banks to invest in student-loan related securities FHLBs may make secured long-term advances upon sufficient collateral to its members to finance the origination of student loans or the purchase of student loan related securities
Student loans and student loan related securities considered eligible collateral
Effective for investments and advances made between 2/1/2008 and period ending 2 years after enactment of this act
Identical legislation introduced in the Senate by Senator Kerry (D-MA) – S. 2847

19. Other Bills H.R. 5914 introduced on 4/29/2008 by Rep. Kanjorski (D-PA)
Authorizes the Federal financing Bank (FFB) to
(1) purchase FFELP guaranteed loans, or participation interests in such loans;
(2) advance funds to eligible lenders for the purpose of originating or purchasing FFELP loans; and
(3) invest in securities collateralized with FFELP loans.
Prohibits such FFELP loan purchases from resulting in any net cost to the federal government.
Authority expires on 7/1/2009
Permits the Secretary of the Treasury to extend the Bank's authority to take such actions beyond 7/1/2009, if economic conditions threaten timely, uninterrupted access to student loans.

20. Dodd letter
Dodd sent letters to Treasury Secretary Paulson and Federal Reserve Board Chairman Ben Bernanke on 4/17/2008 urging the Administration to explore the use of the Federal Financing Bank (FFB) as a means of injecting capital and liquidity into the FFELP
Bernanke letter signed by Dodd plus 6 Democrats on the Banking committee - Senators Tim Johnson (D-SD), Thomas Carper (D-DE), Robert Menendez (DNJ), Daniel Akaka (D-HI), Robert Casey (D-PA) and Jon Tester (D-MT)
Paulson letter signed by the same group plus Senator Bob Corker (R-TN)

21. Administration Response to Dodd letter
4/23/2008 letter to Senator Dodd from Treasury, ED and OMB
Endorses H.R as the preferred means of dealing with the market disruption
Rejects utilizing FFB (“…after a thorough analysis, it is clear that the FFB does not have the authority under the Federal Credit Reform Act to purchase, or otherwise participate in, loans to non-Federal borrowers in these circumstances)
Dodd responds on the same day, expressing disappointment and questioning the Administration’s conclusion that FFB financing is off the table
Efforts underway to draft legislative language to resolve the FFB’s authority to provide capital/liquidity (Kanjorski legislation as an example)

22. Federal Reserve Response to Dodd letter
Bernanke responded to Dodd on 4/25/08
You requested that the Federal Reserve consider allowing primary dealers to pledge certain student-loan-related assets as collateral at the Term Securities Lending Facility (TSLF)
Student-loan-related assets can already be pledged as collateral at the Federal Reserve's other three lending facilities:
the primary credit facility and the Term Auction Facility, both of which serve depository institutions, and
the Primary Dealer Credit Facility, which provides overnight credit to primary dealers
Credit extended through these facilities to depository institutions and primary dealers may be helpful in supporting the liquidity of other participants in the student loan market as well.
[T]he difficulties afflicting the market for student loans reflect a broader range of causes than just the liquidity problems currently facing the economy. The threshold determinant of whether lenders decide to extend new loans is whether they see that activity as a profitable business venture. The fact that a substantial number of lenders have exited this market in recent months suggests that lending to students is not, under current circumstances, profitable. The profitability of such lending is importantly influenced by the spread between the reimbursement that the government pays on such loans and the lending institution's cost of funds. As you know, under legislation enacted last year, the reimbursement rate was reduced substantially.
The other side of the profitability equation--the reimbursement spread paid to lenders under this program--is under the control of the Congress and the executive branch. In particular, Congress may well wish to revisit the question of whether setting a fixed spread over the commercial paper rate is the best approach. You may decide that a more market-sensitive approach--flexible enough to provide a wider spread during times of market stress and a narrower one during normal times--could provide a more robust structure.