Through its Term Asset-Backed Securities Loan Facility (TALF) program, first announced late last year, the Federal Reserve will lend up to $200 billion to spur consumer lending for autos, education, credit cards, and other things.
Under the program, the Fed will buy securities backed by different types of debt. The credit crunch–the worst since the 1930s–has made it much more difficult for people to obtain such financing, and those who do can be socked with high rates.
Last year, 60 private lenders provided $19 billion in loans to students. As of press time, 39 of those have stopped lending to students–and the remaining firms have made it harder to borrow, according to Finaid.org, a web site that tracks the industry.
Consumers can’t get loans directly from the Fed through the TALF program. Instead, TALF provides loans to large investors and companies to buy newly issued securities linked to consumer debt. The idea is to stimulate lending so that consumers, in turn, will find it easier to get loans.
The Fed will make loans each month through December, when the program is set to expire, although the Fed could opt to extend it.
In the first batch of TALF requests in mid-March, investors requested $4.7 billion worth of loans–but none of this initial wave of money will help spur student lending. $2.8 billion was requested to buy securities linked to credit card debt, and $1.9 billion was for securities linked to auto loans. No loans were requested for securities associated with student loans in the first batch of requests.
"This is a good start for a program that we will continue to build on in the future," said William Dudley, president of the New York Fed.
Analysts, however, said the program has gotten off to a slow start. It’s been hobbled by rule changes, worries from investors over financial privacy, and fears among would-be participants about being the first to use the program.
Despite these setbacks, there is cause for optimism, said Elinda Kiss, a professor in the University of Maryland’s Finance Department.
She said the government’s pledge to back loans–including student lending–will make private-sector decision makers more likely to offer credit lines to worthy applicants.
"Any time [lenders] know they can hedge their risk, it makes them more willing to make these types of loans," said Kiss, who has worked for a commercial lender and for the Federal Reserve. "It should make more student loans available in the long run."
Still, Kiss said, if borrowers begin defaulting on mortgages, car loans, and student loans, the long-term stabilization plan could fall through.
"If you have a lot of borrowers who are not paying back the loan on time, that will hurt," she said. "So there certainly is a scenario in which it won’t work."
TALF is just one part of the federal government’s approach to spur student lending. President Obama also has proposed a huge expansion of the government’s role in making college more affordable by aiming to convert all federal student loans to direct government loans.
Obama is seeking to overhaul the federal student-loan system by ending a massive program of government-subsidized loans made by private lenders. Instead, he would boost direct lending by the government in an attempt to save money and protect students from turmoil in the financial markets.
"Our basic thought is, rather than continue to subsidize banks, we want to help dramatically more students get more access to more aid," Education Secretary Arne Duncan said on a conference call with reporters.
The changes in federal aid, an Obama campaign promise, would transform a long-standing partnership between the government and the private sector.
Last year, lenders made $56 billion in loans to more than 6 million students and parents under the subsidized Federal Family Education Loan, or FFEL, program. The government set the terms of and backed the loans, and supporters say it helped students by giving them private-sector capital and good customer service.
But the public-private partnership has begun to crumble under the weight of the recent credit crisis. Hundreds of lenders have stopped making federally backed loans, and hundreds of colleges that had offered only subsidized federal loans have signed up to let their students borrow straight from Washington through direct lending.
At the same time, the government has bought up tens of billions of dollars’ worth of loans to keep student loans flowing.
Obama’s plan would end subsidized student loans in 2010, though officials said private-sector lenders still would be hired to service direct government loans.
Kevin Bruns, a spokesman for the trade group America’s Student Loan Providers, said the subsidized federal loan program has given families uninterrupted access to student loans.
"It has been a rare source of stability," Bruns said. "Now is not the time to talk about abolishing it."
Obama’s plan was embraced by Democrats on Capitol Hill, where House Education and Labor Committee Chairman George Miller of California said the student loan overhaul would save billions of dollars and make student loans more reliable.
Massachusetts Sen. Ted Kennedy, D-Mass., chairman of the Senate Health, Education, Labor and Pensions Committee, added: "The doors to college will be far more open."
Obama’s fiscal 2010 budget plan also aims to keep the federal Pell Grant program growing. Lawmakers have frequently failed to do so, even as college costs have zoomed.
In the 1980s, the maximum Pell Grant covered half the average cost of a public four-year college; by 2006, it covered less than a third. Pell Grants mostly support students from families earning under $30,000 a year.
Obama proposes to take Pell Grants out of lawmakers’ hands, giving the program a mandatory stream of dollars like Social Security and Medicare, and to index Pell Grants to the annual inflation rate.
The newly enacted economic stimulus bill will raise the maximum Pell Grant amount–currently $4,731–to $5,350 on July 1 and to $5,550 next year.
Term Asset-Backed Securities Loan Facility
Federal Family Education Loan program
America’s Student Loan Providers