A deal will be ready within a few weeks to pay off the defaulted loans backed by one of the nation's insurers of student loans, Secretary of Education Lauro F. Cavazos said yesterday.
The timetable for covering the bad loans insured by Higher Education Assistance Foundation (HEAF) of Overland Park, Kan., comes as jittery banks must decide whether thousands of students will get loans for the upcoming academic year.
Bankers have warned that commercial lenders would flee the student loan market if the nonprofit insurer defaulted and they have to absorb losses.
In a further effort to boost lender confidence in the program, the Education Department said regulations will be published next week aimed at barring false information from privately owned trade and technical schools whose students receive the guaranteed loans.
"We are intensively involved in sensitive discussions with other organizations that have an interest in and capacity for assuming all of HEAF's guarantee functions," Cavazos said in testimony before the Senate Labor and Human Resources education subcommittee.
"We are committed to putting in place a solution that will ensure that new loans are made and insured without interruption, and that the existing HEAF portfolio is properly serviced, collected, insured and reinsured," he said.
He told the panel the arrangement would be in place "within a few weeks."
Department spokeswoman Etta Fielek said it is unlikely HEAF will survive the restructuring.
The financially threatened foundation guarantees student loans in Minnesota, West Virginia, Kansas, Nebraska, Wyoming and the District of Columbia, and insures loans in other states as well.
The foundation, one of 47 guarantors across the country, told the Education Department four weeks ago that it was having serious financial problems because of a high rate of defaults. It blamed the problem on overlending to students who attend private trade and technical schools.
Cavazos, who has tightened regulations on lending for students at trade schools, said he will seek further restrictions on their accreditation and licensing next year.
Under the student loan program, banks make the student loans and organizations such as the HEAF guarantee that they will be repaid and take over collection.
The federal Student Loan Marketing Association, known as Sallie Mae, provides money to lenders by selling packages of loans to investors. The Education Department is the backup insurer to the guarantors.