Through its Term Asset-Backed Securities Loan Facility (TALF) program, first announced late last year, the Federal Reserve will lend up to $200 billion to spur consumer lending for autos, education, credit cards, and other things.
Under the program, the Fed will buy securities backed by different types of debt. The credit crunch--the worst since the 1930s--has made it much more difficult for people to obtain such financing, and those who do can be socked with high rates.
Last year, 60 private lenders provided $19 billion in loans to students. As of press time, 39 of those have stopped lending to students--and the remaining firms have made it harder to borrow, according to Finaid.org, a web site that tracks the industry.
Consumers can't get loans directly from the Fed through the TALF program. Instead, TALF provides loans to large investors and companies to buy newly issued securities linked to consumer debt. The idea is to stimulate lending so that consumers, in turn, will find it easier to get loans.
The Fed will make loans each month through December, when the program is set to expire, although the Fed could opt to extend it.
In the first batch of TALF requests in mid-March, investors requested $4.7 billion worth of loans--but none of this initial wave of money will help spur student lending. $2.8 billion was requested to buy securities linked to credit card debt, and $1.9 billion was for securities linked to auto loans. No loans were requested for securities associated with student loans in the first batch of requests.
"This is a good start for a program that we will continue to build on in the future," said William Dudley, president of the New York Fed.
Analysts, however, said the program has gotten off to a slow start. It's been hobbled by rule changes, worries from investors over financial privacy, and fears among would-be participants about being the first to use the program.
Despite these setbacks, there is cause for optimism, said Elinda Kiss, a professor in the University of Maryland's Finance Department.
She said the government's pledge to back loans--including student lending--will make private-sector decision makers more likely to offer credit lines to worthy applicants.
"Any time [lenders] know they can hedge their risk, it makes them more willing to make these types of loans," said Kiss, who has worked for a commercial lender and for the Federal Reserve. "It should make more student loans available in the long run."
Still, Kiss said, if borrowers begin defaulting on mortgages, car loans, and student loans, the long-term stabilization plan could fall through.
"If you have a lot of borrowers who are not paying back the loan on time, that will hurt," she said. "So there certainly is a scenario in which it won't work."
TALF is just one part of the federal government's approach to spur student lending. President Obama also has proposed a huge expansion of the government's role in making college more affordable by aiming to convert all federal student loans to direct government loans.
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