Ahead of the Bell: Student loans

14 March, 2008

Congress wants to know if the Education Department has a contingency plan in place to handle a shortage of federally backed student loans.

The credit-market crisis has reduced the supply of student loans -- but the disruption has not yet hit federally guaranteed loans. If it does, will millions of students be stuck unable to attend college?

That's one of the questions Education Secretary Margaret Spellings can expect to field during her testimony at a hearing of the House Education and Labor Committee Friday morning..

The supply of education loans recently has shrunk as credit has tightened, potentially affecting college-bound students. Several states have suspended their college loan programs.

In recent weeks, distress in the market for auction-rate securities -- short-term investments that are a popular way for companies and some wealthy investors to store their cash -- has rippled into the student loan market. The state student-loan agencies as well as student lending companies such as Sallie Mae are among a host of borrowers that rely on the $330 billion auction-rate market to raise money to fund the loans they make and the projects they build.

Of the $330 billion in securities sold in the auction market, about $80 billion is made up of bundles of student loans.

Federally guaranteed student loans carry lower interest rates than the private student loans whose rates are not capped by law.

Rep. George Miller, the California Democrat who heads the education committee, has urged Spellings to have a plan ready to go "to ensure that students and families have uninterrupted access to federal student loans in the unlikely event" that those loans also are affected.

The hearing starts at 9 a.m. EDT.

Source:-http://www.businessweek.com/ap/financialnews/D8VD52480.htm