A letter was sent out by Education Secretary Margaret Spellings to lenders explaining that the government will purchase some of the student loans, freeing more money up for the issuerers to lend money.
Under the plan, lenders will have the option of selling the government securities backed by student loans on terms markedly more favorable than the rates now available in the financial markets.
In case the offer fails to keep enough private lenders in the system, the Education Department is increasing its ability to issue and service loans directly, Spellings wrote. She added that the department is also prepared to advance money to agencies that would act as lenders of last resort.
Although many lenders have stopped issuing government-backed loans, Bank of America, last month reaffirmed its commitment to issuing federally backed loans. It said it would no longer issue strictly private student loans.
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