Federal Government Expands Program to Buy Student Loans

By ROBERT TOMSHO

Aiming to pump additional liquidity into the student loan market, the federal government will expand its program to buy federally-guaranteed loans made by private lenders.

Under the new effort, the government will purchase loans made between Oct. 1, 2003, and July 1, 2009, if lenders are unable to find investors willing to acquire securities backed by such loans. Previously, the government's buyback program had been limited to loans made for the current academic year and for 2009-2010.

Federal officials estimated as much as $60 billion in additional loans might be eligible for government purchase under the new program. Secretary of Education Margaret Spellings said the expansion is necessary to "provide all the certainty we can" to lenders, students and families.

Typically, lenders make loans to students and parents and then bundle them into securities that are sold to investors. But despite the fact that many such loans are guaranteed by the federal government, in recent months lenders have shunned such investments amid problems with similarly bundled securities related to home mortgages.

In May, President Bush signed a law giving the education department authority to purchase federally-guaranteed student loans made by private lenders for the 2008-2009 school year. Congress subsequently passed legislation extending that authority for an additional school year. Under the legislation, the government can either purchase loans directly or invest in trusts backed by such loans.

But amid the credit crunch, many lenders have had trouble coming up with the capital to make student loans that they can then sell to the government. The new initiative gives them the opportunity to sell loans made in years past to the government, hopefully providing funds for new lending.

Amid cuts in federal subsidies and the seizing up of securities markets, dozens of lenders have stopped making federally-guaranteed student loans.

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