Feds help ailing student loan program

updated 12:32 p.m. ET May 21, 2008

WASHINGTON - Student loan companies, squeezed by the credit crisis, are getting some help from the federal government.

Education Secretary Margaret Spellings told the lenders, in a letter obtained by The Associated Press, that the government will purchase some of the loans, freeing up capital. That way, the companies will have more money to issue new loans.

“Many lenders today do not have access to funds at a cost that justifies originating new loans,” Spellings wrote. “Our plan is designed to provide viability in the marketplace for lenders who step up and make loans in this difficult environment.”

Lenders had told the department they needed more federal help to continue serving college students under the federal student loan program because of the credit crunch and cuts Congress made to lenders’ subsidy levels. The credit crunch has made money less available.

Under the plan outlined by Spellings, the government will pay face value, plus accrued interest and the cost of fees that lenders incur when originating loans. Lenders would also get a payment of about $75 per loan.

The administration also has agreed to invest in pools of loans, something the private market traditionally does but which has become less common due to the crisis in the financial markets. That is expected to make more capital available to lenders at reasonable rates.

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