Subprime Crisis? Put Down That Red Flag.

Lately, there’s been a lot of talk about the subprime mortgage crisis and how the ensuing credit crunch is affecting the college loan industry. It is true that recent market skittishness, combined with the recent subsidy cuts on federal loans and possibly higher default rates due to an overall shaky economy, are creating tough times for some in our industry. But it’s important for all of us in the financial aid community to remember—as well as to convey to the students we serve and the general public—that, no matter how events unfold, we will work together to ensure that every eligible student has access to a federal student loan.

The federal student loan programs remain strong. The largest and most diversified banks are remaining in the FFELP, and in some cases even expanding their loan offerings. And we all should remember that the Lender of Last Resort regulation in the FFELP is still on the books. This rule mandates that FFELP guarantors act as LLRs in their designated states for otherwise eligible students who cannot secure a lender. ASA is committed to working with the Department of Education to ensure access to federal loans for all Massachusetts and DC students and parents.

The details of LLR are still being worked out; Sens. Kennedy and Miller have asked the Education Department to work on the LLR contingency plan. Some lawmakers are also examining the possibility of tapping federal financial institutions to inject liquidity into the student loan market. And if market disruptions continue to plague the private sector, the government can step in to fill any void with the Federal Direct Lending Program. Unfortunately, media headlines continue to snowball every day, blurring the line between private and federal loans and raising panic over loan access at all types of institutions.

Let’s put down the red flag. Over the past year, the student loan industry has faced many challenges to its integrity and reputation. If we now add to that a panic over access, the private sector’s participation in the federal loan program will only continue to be questioned.

Legislators, the Education Department, and members of the loan community should continue to work behind the scenes to prepare for different possibilities. Though it seems like an unlikely scenario, no one wants families and schools to be caught off guard and left without federal loan options. But we need to think of the bigger picture—and how our ultimate customers view that picture—when we communicate with all our audiences. In the end, raising the red flag on the credit crunch may harm the industry more than it will ever benefit students.

Posted by Susan Nathan on March 13, 2008 at 05:21 PM EST

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