U.S. Signals Student-Loan Shift

The U.S. Department of Education has decided to detail its plans for providing emergency student loans, in a sign that its planning for possible disruption of the market that supports college financial aid may be taking on greater urgency.

Despite pressure from congressional leaders and state-level loan-guaranty agencies, the department had previously indicated it didn't see the immediate need to provide such guidance for the last-ditch element of its "lender of last resort" program. In a March 26 letter to student-loan guarantors, the department said it would offer such information if the need arose.

But in an interview Friday, Education Secretary Margaret Spellings said details on when the emergency loan system might be triggered and how it would work will be released "in the next week or two."

While not providing a specific reason for the apparent shift, Secretary Spellings said department officials have been engaged in discussions with private lenders, college officials and others involved in the Federal Family Education Loan, or FFEL, program. "We are taking a lot of soundings," she said.

Hit by an economywide credit crunch and cuts in federal subsidies, more than 30 private lenders have said they will stop making FFEL loans. This week, two major lenders -- NorthStar Education Finance Inc. and CIT Group Inc. -- join the ranks of the dropouts. The FFEL program is the largest source of student financial aid, supplying 7.5 million students and parents with $91.8 billion in federally guaranteed loans in the current school year, according to government estimates.

The picture for loans to cover tuition for the school year beginning next September is less clear. Families are just beginning to get financial-aid notices from schools, starting the borrowing cycle that typically peaks in July and August. Education Department officials have repeatedly said they are monitoring the student-loan market closely and haven't found any indication that eligible students have been unable to get federally guaranteed loans from private lenders.

Guaranty agencies, which would administer the last-resort loan program, were caught off guard but pleased by the heightened attention to the emergency loan system, which has never been used or tested.

Education Department officials had previously been "very clear that they were not going to discuss that point," said Sue McMillin, president and chief executive officer of the Texas Guaranteed Student Loan Corp., Round Rock, Texas. "That's a big change, that's a welcome change," added Brett Lief, president of the National Council of Higher Education Loan Programs, which represents student-loan guarantors and lenders.

In a letter Friday to U.S. Rep. George Miller (D., Calif.), chairman of the House Committee on Education and Labor, the education secretary said the department has determined the emergency Treasury advances would be mandatory and not require a congressional appropriation.

She said the department also plans to expand the capacity of its direct-loan program, whereby students can borrow directly from the government through participating colleges. As it stands, the direct-loan program could quickly handle up to one-third of the borrowers taking part in the competing FFEL program, she wrote.

Under federal law, the Education Department can advance U.S. Treasury funds to the 35 student-loan guaranty agencies around the country if private lenders abandon the FFEL program in droves and students can't get loans through normal channels.

Aiming to pump liquidity into the system, congressional leaders introduced legislation on Thursday that would allow the Department of Education to buy student loans from lenders in need of new capital.

Write to Robert Tomsho at rob.tomsho@wsj.com

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