November 13, 2008 by Mara Strom
Treasury Secretary Paulson spoke yesterday morning at a press conference about the status of the $700 billion federal bailout of the banking industry.
Paulson said that while the original plan was to focus on the failing mortgage industry, the Treasury Department will now be expanding the scope of Troubled Asset Relief Program (or TARP) to include support for consumer loans such as car loans, credit cards and student loans. What does this mean for you, the beneficiary of student loans for college? Let’s take a look:
Will the Federal Government be giving out more student loans?
No, not exactly. When you take out a loan, the bank that makes that loan then sells it to someone else. That’s called a security.
The market for securities on consumer loans, including private student loans, has shut down in the past three months because investors are skittish after the debacle with mortgage securities.
Paulson is suggesting that the government buy up some of these securities in order to “jump-start” the credit markets and encourage private lenders to extend loans to students.
So, while the government will not directly be giving you a private student loan, its actions will hopefully make it more likely that banks (and other private lenders) get back into the business of offering private student loans.
According to the Washington Post yesterday, the details still have to be worked out:
[Paulson] said Treasury is exploring the possibility of the government investing in lending companies besides banks, or offering loans against securities based on consumer debt.
If the Treasury Department does go in this direction, it would not impact Stafford loans, since they are already secured by the federal government.