An Update on ECASLA

In January, the Federal Education Budget Project published an issue brief on the student loan purchase programs put in place under the Ensuring Continued Access to Student Loans Act of 2008 (ECASLA). Given the new developments and new information released by the Obama Administration, it's a good time to catch up on the ECASLA programs.

When financial markets began to break down last year, Congress confronted the possibility that private lenders issuing federally-backed student loans (the Federal Family Education Loan Program, FFEL) might not be able to meet student demand. In response, Congress passed legislation (ECASLA) granting the U.S. Department of Education temporary authority to purchase FFEL loans. The new loan purchase authority helps ensure that FFEL lenders have access to adequate and affordable capital and can convert their loan assets into cash to fund new loans. ECASLA gives the Department of Education considerable discretion in designing and implementing loan purchase programs. Using this discretion, the Department designed and implemented four separate loan purchase arrangements: a put option; a short-term purchase program; a financing arrangement; and an asset-backed commercial paper support program. Each option involves different purchase arrangements and targets loans from different years. The ECASLA issue brief, which will be updated in the coming weeks, includes an explanation of each program and is available here.

ECASLA Performance Info Released

Since January, new information has been made available about the ECASLA programs. In March, the Obama Administration reported the volume of loans each private lender made under each program. The reports show that eleven lenders exercised put options on FFEL loans issued during the 2008-09 academic year, selling $701 million in loans back to the Department of Education. Two lenders, Edamerica and Wachovia Education Finance, accounted for about 90 percent of that volume. Subsequently, the Office of Management and Budget (OMB) released estimates in May 2009 showing that $4.8 billion in 2008-09 loans ultimately will be put to the Department (about 8 percent of expected 2008-09 FFEL issuance).

The Obama Administration also released information in March regarding the short-term purchase program that the Department operated from December 2008 through February 2009. The program applied to 2007-08 academic year leans. In total, six lenders sold $998 million in loans under the program. One lender, the SLM Education Finance Corp (Sallie Mae), accounted for $952 million of that amount.

As of March 18, 2009, the Department had provided $23.2 billion in financing to 23 lenders through the ECASLA participation interest program. The program effectively allows private lenders to borrow from the Department of Education to make FFEL loans to students. SLM Education Finance Corp (Sallie Mae) had used the program to fund $13.8 billion in 2008-09 academic year loans, the most of any one lender. The Student Loan Corporation (Citibank) made $2.1 billion in loans, the second most of any lender using the program. More recent information released by OMB in May 2009 shows that an estimated $33.8 billion in 2008-09 loans will be made through the participation interest program, representing 55 percent of FFEL program loans to be issued that year.

Conduit Program Now In Place

Finally, the ECASLA asset-backed commercial paper conduit program first announced by the Department last November is now up and running. The program was expected to begin in February 2009, but was delayed until May. Under the program, the Department of Education is acting as buyer-of-last-resort for FFEL loans financed through private conduits. The Department has committed to purchase the underlying FFEL loans in the event that a conduit cannot refinance maturing commercial paper. (For more on what an asset backed commercial paper conduit is, read the ECASLA issue brief.)

Under the arrangement, the Department will purchase FFEL loans issued after May 1, 2008, for 100 percent of outstanding principal and accrued interest. Loans issued earlier will be paid out at 97 percent of unpaid principal and accrued interest. The conduit must pay the Department two separate fees, one based on the value of the outstanding commercial paper it has issued to finance FFEL loans, and another based on market interest rates. The conduit will be backed by the put option until January 20, 2014, but no loans may be placed into it after June 30, 2010.

To date, one conduit has been approved by the Department of Education: Straight-A Funding, LLC, which was set up by Citibank and Morgan Stanley and is run by Bank of New York Mellon. In addition to the put option provisions provided by the Department of Education, the federal government will also provide a five-year, $60 billion line of credit to the conduit through the Federal Financing Bank (FFB). The FFB is an existing government corporation within the U.S. Treasury Department that centralizes federal and federally-assisted borrowing. The line of credit will be used to provide short-term (90 day) loans to the conduit if it experiences difficulty refinancing maturing commercial paper. Thus, the Straight-A Funding conduit has two federal supports to ensure liquidity: the FFB line of credit and the Department of Education put option on the underlying FFEL loans. As of May 26, 2009, several large private lenders had announced placement of FFEL loans into the conduit or approval from the Department to begin placing loans into it.

Be sure to read the updated ECASLA issue brief when it is released in the coming weeks.

[Update: The ECASLA issue brief was updated June 1 and is available here]