The American Securitization Forum (ASF) and the Securities Industry and Financial Markets Association (SIFMA) sent a joint letter to Senators Edward Kennedy (D-Mass.) and Michael Enzi (R-Wy.), calling for restraint on student loan reform legislation. Kennedy and Enzi are chairmen of the committee on Health, Education, Labor and Pensions committee.
Specifically, the letter takes aim at the committee's plans to increase obligation fees and reduce loan guarantees and yields in the Federal Family Education Loan Program (FFELP) program.
"Significant cuts in the special allowance payments (SAP) and the government guaranty rate for FFELP loans will likely result in negative consequences that will ultimately hurt student borrowers," the organizations say.
Noting that last year, more than $67 billion of securities backed by FFELP loans were issued in the United States, the trade associations said potential changes might eliminate the incentive for private capital to flow into the program for many lenders with industry-average administrative, operating and financing costs. Many lenders might leave the FFELP business, they say. As the number of lenders shrink, the organizations claim, so will the total supply of loans available for the capital markets.
Also, the trade associations claim that a reduction in loan guarantees would make funding student loans in capital markets more expensive for issuers, because institutional investors exposed to larger potential principal losses on collateral containing these lower guarantee rates will discount the values of student loan ABS.