The recent passage of the health care reform act will have a substantial impact on the student loan industry as a result of the concurrent passage by the United States House of Representatives (the “House”) and the United States Senate (the “Senate”) of provisions eliminating the Federal Family Education Loan (“FFEL”) Program. The recently enacted law has the potential to drastically alter the student loan securitization market and have significant effects on the business of banks currently participating in the market as FFEL Program lenders.
On March 21, 2010, the House passed the Senate health care reform bill (H.R. 3590, 111th Cong), which was signed into law by President Obama as the Patient Protection and Affordable Care Act on March 23, 2010. In connection with the passage of the Senate health care reform bill, the House also passed the Health Care and Education Reconciliation Act of 2010 (the “Reconciliation Act”) by a vote of 220-211. H.R. 4872, 111th Cong. The Senate, having considered the Reconciliation Act under expedited budget reconciliation rules, proceeded to pass the Reconciliation Act on March 25, 2010 with minor amendments requiring a further vote by the House, which occurred on the same day. On March 30, 2010, the Reconciliation Act was signed into law by President Obama, giving effect to comprehensive student loan reform provisions, in addition to those related to health care and other education initiatives.
Although the primary purpose of the Reconciliation Act was to resolve discrepancies between the Senate and the House health care reform bills, the Reconciliation Act also contains the SAFRA Act (as Title II, Subtitle A of the Reconciliation Act), which implements significant reforms to higher education and education funding. In particular, Part II of the SAFRA Act imposes widespread student loan reform and significantly amends the Higher Education Act of 1965 in numerous respects. These changes are intended to create government savings, projected at approximately 61 billion dollars over ten years by the Congressional Budget Office, by eliminating the need for federal guarantees of privately originated FFEL Program loans. Such savings are anticipated to be used, in part, to provide further funding for Pell grants.
Of particular importance to private lenders and entities involved in the student loan securitization arena is section 2201 of the SAFRA Act, which provides that “no new loans (including consolidation loans) may be made or insured under [the FFEL Program] after June 30, 2010” and “no funds are authorized to be appropriated, or may be expended, … to make or insure loans under [the FFEL Program] (including consolidation loans) for which the first disbursement is after June 30, 2010” unless a subsequent act of Congress were to be enacted. In lieu of borrowing from FFEL Program lenders, after June 30, 2010, student loan borrowers will participate in the William D. Ford Federal Direct Loan Program, eliminating private lenders from this area of origination. As a result, newly originated federal student loans will essentially be removed from the student loan securitization arena, effectively limiting the assets available for securitization to private student loans or FFEL Program loans originated prior to June 30, 2010.
Included within the numerous amendments set forth in Title II, Subtitle A of the SAFRA Act that give effect to the elimination of the FFEL Program, section 2212 of the SAFRA Act may additionally alter the landscape for servicers in the student loan industry. Under section 2212, the Secretary of the Department of Education will appoint eligible not-for-profit servicers to service loans made through the Federal Direct Loan Program by the implementation of a competitive bidding process and the application of certain selection criteria. When similar provisions were included in the SAFRA Act as originally introduced in 2009, questions were raised in the market as to the impact of these changes to servicer appointment on existing securitizations of FFEL Program loans, particularly if servicers exit the market due to the altered statutory framework. The effect on servicers, and consequently on existing student loan securitizations, remains unclear.
The impetus to enact a significant health care reform act seems to have provided the mechanism for the Obama administration to also achieve its goal of implementing widespread student loan reform, despite opposition from private lenders. Participants in the student loan industry now must confront a vastly different student loan securitization market as a result of the enactment of the SAFRA Act.
