Fed action brings cash for student loan market
Friday May 2, 5:47 pm ET
By Marcy Gordon, AP Business Writer
Fed action on credit crisis included cash injection for shaky student loan market
WASHINGTON (AP) -- Action taken by the Federal Reserve on Friday targeting the global credit crisis, in concert with European central banks, included an injection of cash into the stricken student loan market through a special lending operation.
Lawmakers and the student loan industry have been pressing for such action by the central bank for weeks, as distress in the credit markets has caused more than 60 lenders to stop making federally guaranteed student loans, either temporarily or permanently.
The exiting lenders, which include college loan agencies in several states, account for an estimated 15 percent of the federally backed student loan market. Their departure comes at the time when students headed to college next year must lock in their loans.
In the move, the Fed is allowing investment firms and banks to use bonds backed by federally guaranteed student loans as collateral for the loans of safe Treasury securities that the central bank is making available.
"The Fed's decision...will help inject much-needed liquidity into the student loan market," Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, said in a statement.
More than two dozen lawmakers of both parties earlier this spring asked the Fed to inject cash into the student loan market by taking that action. But Fed Chairman Ben Bernanke responded in a letter that it wasn't the central bank's intention to do so at that point.
"I am pleased that the Federal Reserve Board has changed its policy," Dodd said in his statement.
He said the move, coupled with legislation passed by Congress this week giving the Education Department temporary authority to buy loans from student lenders to ensure their access to capital "represents a timely response to funding concerns in the student loan market and should allow lenders to continue to make loans to students who need them."
President Bush is expected to sign the legislation, which also would let the education secretary advance federal money to designated companies that would operate as "lenders of last resort" if they run out of capital to make new federally backed loans.
The Fed said Friday it was boosting the amount of emergency reserves it supplies to U.S. banks to $150 billion in May, from the $100 billion it supplied in April. The Fed took this action and several other moves to boost credit in coordination with the European Central Bank and the Swiss National Bank. ( God Bless those Swiss Bankers -- ed. JP)
The latest moves are part of a series of actions the Fed has made since the credit crisis struck in August.
The efforts are designed to increase reserves so that banks don't become hesitant about lending to consumers and businesses, which would make the current economic slowdown even more severe.
The Fed's decision to boost the amount of loans it makes to banks every two weeks, in a process known as a Term Auction Facility, was aimed at sending a strong signal that the central bank is prepared to supply as much in reserves as U.S. banks need. The latest move was made in coordination with the European central banks' efforts to bolster their financial systems as well.
The European Central Bank said it will increase the amount of dollars offered to $25 billion in the latest series of tenders, with the auctions to come every two weeks. The tenders' maturity will be 28 days. Previously, the ECB has auctioned off amounts that have ranged from $10 billion to $15 billion per tender but without a set schedule.
Associated Press writers Martin Crutsinger in Washington and Matt Moore in Frankfurt, Germany, contributed to this report. |
