Washington — In its latest effort to thaw out the student-loan market, the federal government will soon begin acting as a buyer of last resort for older student loans.
The program, which was announced in November and is set to begin in February, aims to free up additional money to make federally guaranteed student loans, ensuring their continued availability. Under the program, the Treasury and Education Departments will step in when a “conduit” — in this case, a bank or group of banks set up to purchase student loans — is unable to refinance its student loan-backed bonds. The Federal Financing Bank will help out initially, then the Education Department will buy the loans after 90 days.
While there can be more than one conduit, the Education Department has so far announced an agreement with only one, the Bank of New York Mellon.
The conduit program marks a fourth phase of the government’s intervention in the student-loan market. The Education Department has been lending money to banks and buying up newer student loans since May; it began purchasing loans issued in the 2007-8 academic year in December.
But banks have been stuck with securities backed by older loans, unable to refinance them in the frozen capital markets. The new program aims to unclog banks’ balance sheets by reassuring investors that securities backed by student loans will remain liquid.
Once the conduit starts operating, sometime next month, the Department of Education’s temporary purchase and lending programs will end. —Kelly Field