R.I. agencies sidestepping upheaval in student loans

Rhode Island agencies involved in the student loan business have so far managed to dodge the upheaval that has disrupted student loan programs nationwide.
For months, lenders have been dropping out of the federal government-backed student loan programs as well as private loan programs, since as the credit-crunch has deepened, those loans have become less lucrative.
Even state-operated loan agencies in several states have been forced to suspend operations in part because of disruptions in the auction-rate bond market, through which many of these authorities obtained financing more cheaply.
But in the Ocean State, R.I. Student Loan Authority (RISLA) – the state’s largest student lender — remains in business. In fact, executive director Charles Kelley said last week that the quasi-public agency is ready to sell $64 million in bonds to investors to fund a private, fixed-rate student loan program.
This week, Kelley said, the authority should learn how much the interest rate will be on the bond issue, and then officials will be able to set an interest rate for student borrowers and their families.
Because of the volatility in the financial markets, it’s the first time a deal of this type – tax-exempt bonds not backed by the state – has been completed by a loan authority nationwide in several months, according to Kelley.
Instead of using a bond insurer – many of them have suffered downgrades in their credit ratings in recent months as part of the subprime meltdown – the authority obtained a triple-A rating from Standard & Poor’s and Fitch Rating Service, according to Kelley.
“We’ve had a good track record,” he said. “We didn’t get into the subprime student loan market. We’ve been very conservative.”
Auction-rate bonds, however, do remain an issue for RISLA.
The agency has about $660 million in auction-rate bonds – long-term debt for which interest rates are reset periodically through investor auctions – outstanding, but investors have become skittish about these types of securities, which means higher interest rates.
But Kelley said the authority has decided to ride out the turmoil surrounding auction-rate bonds, something he said RISLA can afford to do that because the agency refused in December to raise its contractual maximum interest rate it could be charged to make its bond issues more attractive to investors.
Now, as other agencies and nonprofit institutions were forced to pay skyrocketing interest rates when the auction-rate securities market collapsed, RISLA’s rates have remained relatively low – between 2.97 and 5.53 percent as of last month. The hope is that the markets will calm soon, Kelley said.
“We are paying a higher rate,” he said. “But it’s certainly not disastrous.”
The unrest in the student loan business certainly has the attention of officials at the R.I. Higher Education Assistance Authority (RIHEAA), which acts as the guarantor for the lenders that participate in the federal student loan programs, including RISLA.
Gail Mance-Rios, RIHEAA deputy director, said last week only one lender of note that the agency had worked with has backed out of the federal loan programs – Sovereign Bank.
In that case, prospective borrowers were directed to numerous other institutions that are still making student loans.
“The list of those who have dropped out changes on a daily basis, increasing actually,” Mance-Rios said. “But we have not seen any our major lenders withdrawing from the [federal] program.”
So far, 61 lenders have stopped making federally backed student loans since last year, according to FinAid.org, a Web site that tracks the industry. And 21 of those lenders have also suspended private student loan programs, included financial giant Bank of America.
Mance-Rios said financial companies have become wary of the student loan business because of the College Cost Reduction and Access Act of 2007, which cut fees that lenders are paid to process the loans.
“Lenders are running on much smaller margins because of it and access to funding has been dramatically reduced,” Mance-Rios said. “So between the two, lenders are just temporarily suspending the programs.”
Recognizing that borrowers may also be feeling the effects of the economic woes, RISLA has waived the 1-percent default fee typically charged by the federal government to each borrower. Mance-Rios said the authority will use its own cash reserves to reimburse the government in a move that could cost the agency as much as $5 million.
“We know students are having a hard time financing their education,” Mance-Rios said. “This is one thing we can do for them.” &#8226

No posts to display