Emergency Bid To Use FHLBs To Ease Liquidity Crunch in Student Loans

Emergency Funds Would Ease Liquidity Crunch in Student Loans

WASHINGTON – A bill introduced in Congress last night would add liquidity to the troubled student loan market by allowing the Federal Home Loan Banks to provide advances to student lenders and to invest in student-loan backed securities.

The bid comes as a growing numbers of lenders–45 since last August–have either cut back or ended their participation in the guaranteed student loan program, known as the Federal Family Education Loan Program. At the same time, skittish investors have balked at buying student-loan backed securities, drying up liquidity in the secondary market.

Pennsylvania Congressman Paul Kanjorski, chairman of the House Financial Institutions Subcommittee on Capital Markets, said he introduced the emergency measure only after the Federal Reserve refused to add liquidity to the student loan market.

"The student loan market currently faces severe liquidity problems and cannot access capital. The Federal Home Loan Banks can help provide such access," said Kanjorski.

"More and more student loan originators are also suspending or halting participation in the Federal Family Education Loan Program. Because the Federal Reserve, the Treasury Department and the Education Department have failed to appreciate the gravity of the situation, I am taking action now in Congress by introducing the Emergency Student Loan Market Liquidity Act to help that ensure that the anticipated nearly seven million borrowers will have access to their student loans in the next school year."

"Because many student loan originators are not depository institutions, liquidity vehicles, such as the ability of banks to access the Federal Reserve’s Discount Window, are unavailable," said the Pennsylvania Democrat. "Moreover, unlike the housing industry, there is no longer a government-sponsored enterprise to provide a reliable source of liquidity for the student loan industry.

The Emergency Student Loan Market Liquidity Act contains three emergency authorizations that will last for two years from enactment. First, the bill allows Federal Home Loan Banks to invest in student loan-related securities with their surplus funds. Second, the bill allows the Federal Home Loan Banks to accept student loans and student-loan related securities as collateral. Finally, the legislation permits the Federal Home Loan Banks to provide secured advances to its members to originate student loans or finance student loan-related securities.

The 12 regional FHLBs were created during the Great Depression to provide liquidity to the mortgage markets by offering low-cost funds to S&Ls,  tand more recently, banks and credit unions to help them finance their mortgage lending. They hold more than $850 billion in assets.