Congress sets the interest rates borrowers pay and the subsidy levels lenders receive under the program. Last year, lawmakers cut billions in subsidies to lenders to pay for increases in student aid.
That cut into lenders' profit margins as did the recent credit crunch in the financial markets, which has made it expensive for lenders to get the capital they need to offer loans to students.
Congress recently passed a law that gives the Education Department the authority to buy up loans from lenders to ensure they have access to capital.
On Tuesday, administration officials told lenders they would use that authority, according to an administration source and a source briefed by administration officials. Both spoke on the condition of anonymity because the administration had not officially publicized its plans Tuesday night.
The government will pay face value for the loans, plus the cost of accrued interest and the cost of fees lenders incur when originating loans, according to the source briefed by administration officials. Lenders would also get a payment of about $75 per loan, the source said.
That's not the only option lenders will have.
The administration also has agreed to invest in pools of loans, something the private market traditionally does but which has become less common due to the crisis in the financial markets. That is expected to make capital available to lenders at rates that are lower than market rates.
Those options will be available to lenders for the 2008-09 school year. Students are now trying to put together financing for the fall semester.
Dozens of lenders have recently stopped making loans in the federal program.
"The cuts made to the lenders last year were too severe, and they are making it impossible for many lenders to continue," said Harrison Wadsworth, a lobbyist for the Consumer Bankers Association.
So far, however, where lenders have stopped issuing federal student loans, other lenders have stepped in or students have received support through a smaller program in which the Education Department lends money directly to students.
The administration is expected to send lenders a letter Wednesday describing the details of its plan to give the industry a boost.
Sallie Mae executives have scheduled a conference call with colleges for Wednesday to discuss the federal student lending program.
