Higher Ed Lenders Seek Liquidity

WASHINGTON - Nonprofit student loan lenders in Kentucky and New Mexico have each privately placed $50 million of short-term debt with their respective states as part of efforts to find short-term liquidity that will allow them to participate in a program run by the Department of Education to assist non-bank lenders in financing student loans.

The transactions, which were announced last week by the Kentucky Higher Education Student Loan Corp. and New Mexico Student Loans, come as a few large nonprofit student lenders - some of which are historically large issuers of tax-exempt debt - have suspended their participation in the Federal Family Education Loan program. Market conditions have made it expensive for the lenders to raise capital and they have been unable to secure crucial bridge loans needed to participate in the DOE's program.

But the $50 million of bonds that Kentucky and New Mexico's lenders each sold to their states essentially serve as bridge loans for the purposes of the DOE program, and the lenders say the bonds will guarantee they will continue to participate in FFEL.

"While other state student loan programs are struggling, our partnership will ensure that Kentucky can continue to fulfill our public-purpose mission of making higher education more accessible to our students and families," said Edward Cunningham, chief executive officer of the KHESLC.

Under the terms of the DOE liquidity program, the department will provide liquidity to FFEL lenders, but only after they have obtained loans elsewhere, because the DOE does not believe it has the authority to provide money to lenders that haven't already originated loans. A law signed in early May authorizes the DOE to provide liquidity to FFEL lenders and to also purchase the loans through September 2009 if lenders remain unable to issue debt backed by the loans they originate.

The Kentucky taxable bonds, which will mature in November 2009, were sold to the state and will pay an interest rate that is equal to 90-day commercial paper rate plus 50 basis points, which was about 3.2% last week. It is also the same rate that the DOE will pay to lenders who borrow through its liquidity program.

Now that KHESLC has closed on the deal, Cunningham said it will disburse about $40 million of backlogged requests for student loans, after which it will be eligible to borrow funds through the department once a week, via a custodian. The agency will have the option of selling, or "putting," the underlying loans to the DOE through September 2009, or securing long-term financing outside the department's program.

Woody Farber, president and CEO of NMSL, said his agency's bond deal, which was privately placed with the office of state Treasurer James Lewis, will ensure that the residents of New Mexico, as well as any student attending New Mexico colleges and universities, can continue to borrow for the upcoming academic year.

"We appreciate the willingness of the state treasurer to assist at this time of unsettled financial markets," he said.

Farber would not say the precise rate NMSL will pay on its bond deal, which matures March 31, only that it is based on a spread of the London Interbank Offered Rate and is a slightly above the CP-plus-50-basis-points rate that the DOE will offer to participants in its liquidity program.

Farber said that NMSL is somewhat unique because it is one of the few nonprofits to recently secure bridge loans from a depository institution, a $20 million line of credit with the Bank of the West. But he said the LOC is not large enough to cover all of the disbursements his agency needs to make and that bond deal is "a way for the state treasurer to make a good investment and assist us in helping the students in New Mexico."

NMSL's line of credit, which could be tapped as a bridge loan, is significant because a number of large nonprofits - including the Pennsylvania Higher Education Assistance Agencyand NorthStar Education Finance Inc. - have suspended their FFEL borrowing largely because they were unable to secure bridge financing.

Some market participants cautioned that even though many nonprofit lenders continue to look for bridge financing, there are still plenty of for-profit FFEL lenders who remain in the program, including Sallie Mae. John Dean, special counsel for the Consumer Bankers Association, said implementation of the DOE program should be considered a success because no students appear to have been unable to find loans for the fall.

"That should be the litmus test - are students are getting the loans they need for college?" Dean said.

Still, representatives of nonprofit student loan lenders said they are pleased to see states stepping in to help lenders amid the ongoing market turmoil, and noted that the bond deals in Kentucky and New Mexico come after a similar arrangement was reached in Arkansas in late May.

In addition, South Carolina purchased a $50 million portion of a $600 million taxable deal sold by the South Carolina Student Loan Corp. in June, while the North Carolina State Employee Credit Union purchased all $1.09 billion of bonds sold by the North Carolina State Education Assistance Authority that month.

"The states' have a track record of funding post-secondary education," said Peter Warren, executive vice president of the Education Finance Council. "In this case, it's a win-win situation for them. In purchasing a student loan bond from a state-based issuer, for example, a state is both investing in the human capital of its residents and acquiring a valuable and marketable asset backed by high-performing collateral."

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