State Agencies Get Creative on Student Loans

As usual sources of financial backing dry up, Illinois and North Carolina loan providers work with state credit unions to ensure continued flow of funds to student borrowers.
September 5, 2008

As various lenders and some of its peers in other states announced in recent months that they would stop making federal or private loans because of disruptions in the capital markets, the Illinois Student Assistance Commission steadfastly held firm. "We saw it as a must do, and had said we’d be there no matter what," said Andrew Davis, the commission's executive director.

The only problem, Davis acknowledged, is that officials at the agency -- which guarantees student loans and oversees most student aid programs in Illinois -- "weren’t quite sure how we would fund" the operations behind that promise. Like many nonprofit lenders in particular, Illinois had seen its primary source of financial backing for its loans dry up, because of the collapse of the auction-rate securities market.

Fortunately for the agency and the 20,000-plus students whose federal loans it will finance this academic year, the Illinois commission became one of several state loan providers that have found alternative ways of funding their loans in the current economic climate. Last month, days after the Massachusetts loan agency announced that it would not make federal loans this academic year, the state of Kentucky said that it was issuing a $50 million bond to ensure that the Kentucky Higher Education Student Loan Corp. could continue to issue federal student loans. (Massachusetts officials had considered but then backed away from a similar plan.)

The Illinois agency contemplated several options for finding the money to finance its 2008-9 loans, including bank financing and the federal government's newly designed process for bolstering lenders to ensure that students continue to have access to federal loans. Davis was most intrigued, though, by an idea he liberally borrowed from North Carolina.

There, last spring, officials at the State Employees' Credit Union had approached Steve Brooks, executive director of the North Carolina State Education Assistance Authority, after learning about the turmoil shaking the student loan industry. "It's a very civic-minded group, and they wanted to make sure North Carolina students were protected," said Brooks. The credit union agreed to back a $1.1 billion student loan bond to refinance some of the authority's auction-rate securities (for private and federal loans) and to finance some new loans in the new academic year.

While the credit union's investment will not finance all of the state agency's loans for the year or refinance all of its outstanding debt, the vote of confidence should make it easier, Brooks said, for the state loan authority to refinance another $1.3 billion through variable rate bonds in the coming months.

"This represented a great breakthrough for us," he said.

North Carolina's arrangement inspired Davis in Illinois. He approached the Illinois Credit Union League to see if its member credit unions might be interested in backing the student loan agency, given the organizations' tradition of making "mission-based loans," Davis said.

The result: a pending agreement for eight credit unions to provide about $100 million, in three traunches timed to the annual financial aid cycle, through the course of the 2008-9 academic year.

"This will more than meet our anticipated need, but if we find there is more need" -- more students than usual have been applying for loans through the agency's Web site, Davis said -- "we may be able to go back for more." The agency provides loans to most students at about a half dozen colleges in the state, including Western Illinois University, Southern Illinois University at Edwardsville, and the University of Illinois at Springfield, Davis said; many colleges in Illinois participate in the federal government's competing direct loan program.


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