Education Department Proceeds with Student Loan Auction

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Written by: Michelle Cormier
Published: 03/05/2009

Education Department Proceeds with Student Loan Auction

The US Department of Education will proceed with plans to use an auction to set student loan subsidies for the PLUS loan program, which allows parents to borrow money on behalf of their children while paying low interest rates and having higher consumer protection than they would get from a private loan.

The government-run auction process allows lenders to bid for the right to originate PLUS loans at all the institutions in a given state. The two lenders that agree to accept the lowest federal subsidies will earn the right to make loans in that state for two years.

On Monday, the department published a notice in the Federal Register, asking the Office of Management and Budget to approve its auction bidding forms promptly. The department must select the lenders by the Congressionally-imposed deadline of July 1.

In recent weeks, a group of financial aid officers urged the Education Department and members of Congress to delay the auction to prevent disruptions to the PLUS program. The group feared that the department would not complete the auction in time for colleges to award the loans for the coming academic year.

Now that the department has decided to forge ahead with the plan, others question whether lenders will bid. According to The Chronicle of Higher Education, many lenders now rely on federal bailout dollars to make new loans; when that money runs out at the end of the next academic year, they might struggle to finance PLUS loans.

President Obama's budget plan, released last week, called for an end to entitlement subsidies for the bank-based student-loan program altogether. If Congress approves the plan, there will be no need to set student loan subsidies, seeing as there would be no banks to subsidize. The auction process would then become a moot point.