WASHINGTON - Congressman Paul E. Kanjorski (D-PA), the Chairman of the House Financial Services Capital Markets, Insurance, and Government Sponsored Enterprises Subcommittee, today introduced emergency legislation to provide an important, temporary source of liquidity in the student loan marketplace, help prevent more originators from departing the industry, and maintain stability in the existing student loan distribution system.  Chairman Kanjorski is seeking a legislative solution in H.R. 5723, the Emergency Student Loan Market Liquidity Act, after receiving a reply last week from Federal Reserve Chairman Ben S. Bernanke indicating that the Federal Reserve will avoid taking action at this time to help the student loan marketplace.

"The student loan market currently faces severe liquidity problems and cannot access capital.  The Federal Home Loan Banks can help provide such access," said Chairman Kanjorski.  "More and more student loan originators are also suspending or halting participation in the Federal Family Education Loan Program.  Because the Federal Reserve, the Treasury Department and the Education Department have failed to appreciate the gravity of the situation, I am taking action now in Congress by introducing the Emergency Student Loan Market Liquidity Act to help that ensure that the anticipated nearly 7 million borrowers will have access to their student loans in the next school year."

As of April 8, according to the award-winning FinAid.org website, 45 student loan originators have decided to exit or suspend their participation in all or part of the Federal Family Education Loan Program (FFELP) since last August.  These providers account for 12 percent of the Stafford and PLUS loan origination volume under the FFELP and 39 percent of the consolidation volume under the FFELP.

Because many student loan originators are not depository institutions, liquidity vehicles, such as the ability of banks to access the Federal Reserve's Discount Window, are unavailable.  Moreover, unlike the housing industry, there is no longer a government-sponsored enterprise to provide a reliable source of liquidity for the student loan industry.

To fix this problem, the Emergency Student Loan Market Liquidity Act contains three emergency authorizations that will last for two years from enactment.  First, the bill enables Federal Home Loan Banks to invest in student loan-related securities with their surplus funds.  Second, the bill allows the Federal Home Loan Banks to accept student loans and student-loan related securities as collateral.  Finally, the legislation permits the Federal Home Loan Banks to provide secured advances to its members to originate student loans or finance student loan-related securities.

"The addition of this temporary power is closely in line with the existing mission of the Federal Home Loan Banks to support community and economic development.  I spearheaded the effort in 1999 to improve this authority within the Federal Home Loan Bank System.  An educated workforce promotes economic development," noted Chairman Kanjorski.  "Moreover, in order to protect the safety and soundness of the system, my bill has appropriate safeguards to ensure that the Federal Home Loan Banks only invest in and use as collateral those instruments with the highest investment ratings and which are federally guaranteed."

On March 17, Chairman Kanjorski, joined by 31 other bipartisan Members of Congress, sent a letter to Federal Reserve Chairman Ben S. Bernanke urging him to take action to inject liquidity into the student loan marketplace to help all types of originators.  In his response last week, which Chairman Kanjorski released today, Chairman Bernanke expresses his concerns about the current student loan marketplace, but states that the Federal Reserve is unable to provide extensions of credit to student loan lenders at this time.  This response prompted Chairman Kanjorski to take today's legislative action on this issue.

In addition, Chairman Kanjorski and 20 other Members of Congress received a response on March 28 to their earlier letter in which they urged Secretary of the Treasury Henry M. Paulson, Jr. and Secretary of Education Margaret Spellings to take action to address capital access problems in the student loan marketplace.  The Administration's response also failed to recognize the urgency of the student loan market situation.

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Editor's Note:  Click on the following links for copies of the section-by-section of the Emergency Student Loan Liquidity Act , the March 31 response from Federal Reserve Chairman Bernanke to Chairman Kanjorski , and the March 28 response from Treasury Secretary Paulson and Education Secretary Spellings to Chairman Kanjorski .  Also click on the follow links for copies of Chairman Kanjorski and the respective Members' original letters to Chairman Bernanke and Secretary Paulson and Secretary Spellings .