Instead of a rights auction for Parent PLUS loans, where lenders will bid on the lowest special allowance payments they'd be willing to accept, I propose that Congress establish a reverse auction where the federal government would invest in FFELP securitizations and lenders would bid on the highest cost of capital they'd be willing to accept. This will not only narrow the differential between FFELP and DL at the other end of lender spread, but it will inject liquidity and stability into the student loan ABS market at no cost (and considerable profit) to the federal government. Title VII of the College Cost Reduction and Access Act of 2007 proposed a state-by-state rights auction for the Parent PLUS loan, where lenders would bid the lowest special allowance payment (SAP) they'd be willing to accept in order to originate Parent PLUS loans. Bids would start at CP + 1.79%, the current SAP for PLUS loans. Note that these loans would have a 99% guarantee (100% if the lender acts as a lender of last resort), compared to the 95% guarantee that starts in 2012, and would have a 0% lender-paid origination fee, compared with the current 1% fee. In addition, consolidation loans based on these PLUS loans will not have to pay the 105 bp interest payment rebate fee, representing a significant savings compared to current consolidation loans. The design of this rights auction is flawed. There are at most seven states in which there is enough Parent PLUS loan volume to generate serious interest. In all other states I expect the lenders to bid the ceiling. I previously estimated that the lender bids would be less than a 5% to 10% discount on the spread. The CBO's estimate of an average SAP of CP + 0.60% is overly optimistic. At the time I estimated that the savings to the government would be much less than the $2 billion estimated by the CBO, and probably at most $750 million. In light of the impact of the recent subprime credit crisis on lender cost of capital, I would not be surprised if lenders universally bid the ceiling in all 50 states. This would mean that the federal government would end up losing a few hundred million dollars from the rights auction, instead of saving money. There is, however, a better option that will not only save the government money, but also address the liquidity issues associated with the turmoil in the asset-backed securitization market. Instead of cutting costs by reducing lender spread at the top end by accepting bids for a lower SAP, I propose that the federal government conduct a quarterly reverse auction for US Treasury investment in student loan securitizations. Lenders would bid on the highest cost of capital they would be willing to accept in exchange for the liquidity they need. The US Treasury would offer to buy up to $20 billion or more in FFELP securitization volume for a set premium weighted according to the proportion of each credit tranche in the securitization. The lenders would bid the interest rates they would be willing to pay for each tranche, subject to certain minimum bids. (Alternately, the interest rates could be fixed and the lenders could bid the lowest premium they'd be willing to accept, subject to certain ceilings.) Either way, the federal government is earning the spread between US treasuries and LIBOR plus a margin, helping to defray the cost of the FFELP program and narrowing the differential between FFEL and DL subsidy rates. (If Congress were to switch the index on special allowance payments from the Commercial Paper Rate to LIBOR in a cost-neutral fashion, the government's savings from this proposal would be more predictable, since securitizations are pegged to LIBOR.) This would not only be a vote of confidence in FFELP securitizations and jump start the student loan ABS market by increasing demand to match supply, but it would also directly inject liquidity into the student loan market. It's a win-win idea that solves two problems with a single proposal. Mark -------------------------------------------------- Mark Kantrowitz Publisher, FinAid Director of Advanced Projects, FastWeb Author, FastWeb College Gold FinAid Page LLC PO Box 2056 Cranberry Township, PA 16066-1056 Tel: 1-724-538-4500 Fax: 1-724-538-4502 Email: mkant@finaid.org, mkant@fastweb.com www.fastweb.com www.finaid.org www.collegegold.com