Fed. Education Secretary Says Student Aid Stands, Despite Market Troubles

The federal education secretary told Congressional lawmakers Friday that despite tight credit markets, students would still be able to find a lender to help them borrow money for college.

“Federal student aid will continue to be available,” said Secretary Margaret Spellings, testifying before the House Committee on Education and Labor. Although a “small number” of lenders have stopped making loans in the federally guaranteed program, she continued, “other lenders have stepped in to meet student needs.”

Facing tough questions, at times, from lawmakers, Ms. Spellings said the Education Department was monitoring market conditions and collecting information from colleges to find out whether their students had been unable to borrow. She said that, if necessary, the direct-loan program, through which students borrow directly from the government, could double the amount of new loans to student borrowers.

Students could also borrow under a “lender of last resort” program from guarantee agencies, which back student loans for the federal government , she said.

Officials in the lending industry and at some colleges, especially commercial institutions, have raised concerns in recent weeks that tight credit markets may make it more difficult for students and their families to find willing lenders. Investors have proved reluctant to buy securities backed by student debts, making it more difficult for lenders to raise the capital they need to make loans.

“I hope we’re not waiting for a problem to develop,” said Representative George Miller, Democrat of California and chairman of the House committee. “We have been forewarned.”

Mr. Miller pressed Ms. Spellings to specify the steps she had taken to ready the federal government to make sure loans would be available to students, should banks and other private lenders be unable to meet demand.

“I’m asking whether or not you have asked the operational question,” Mr. Miller said, adding, “Have you sat down with the Treasury Department” and asked whether money could be made quickly available for the loans of last resort?

Ms. Spellings responded that the department would be ready.

Representative Howard P. McKeon of California, the senior Republican on the committee, said market conditions were only one obstacle facing lenders. Recent cuts to federal subsidy payments to lenders might help to create a “perfect storm” blocking access to loans, he said.

“There are real questions about whether loan providers will continue to participate in the federal loan program as a result of the cuts,” Mr. McKeon said.

Mr. McKeon also said that in its effort to respond to the credit crisis, the government should not “favor one loan program or the other,” a reference to the direct-loan program, which Ms. Spellings had said could expand.

Some Republicans have been strong critics of the direct-loan program, saying private lenders do a better job at serving students. But its advocates say it has been held back by lawmakers and regulators from offering more competitive rates and benefits.

Financial analysts have said it is too early to know how market turmoil will play out because most students will be applying for loans in earnest over the summer to pay for the fall semester. While Ms. Spellings said she had so far not heard from colleges that had observed problems firsthand, a later witness at the hearing, Paul Wozniak, managing director at UBS Securities, offered a darker assessment.

“The burden on this marketplace is significant and real and is unlikely to correct itself to avoid having an impact on access to loans,” Mr. Wozniak said.

Senator Edward M. Kennedy, Democrat of Massachusetts and chairman of the Senate education committee, plans to hold a hearing on student loans on Monday in his home state.