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Credit Issues Hit Student Loan Sector

WASHINGTON - Arkansas and a few other states are responding to a looming student-loan lending crisis by considering loaning bond-issuing authorities money to make loans to students for the coming academic year.

The states are weighing loans in the wake of a credit crunch that has prevented the authorities from being able to access the bond market in a cost-effective manner.

But help could be on the way as Congress is expected to take up and possibly approve legislation this week that would enhance the ability of the federal government to temporarily purchase student loans originated at the state level.

Arkansas seems to have gone furthest with the loan idea thus far. The state board of finance last week gave its preliminary approval to an $80 million line of credit for the Arkansas Student Loan Authority after market turmoil forced the authority to shelve its plans for a $270 million bond sale.

Officials in South Carolina are said to be considering similar lines of credit, but could not be reached for comment yesterday. A Colorado bond authority official said that state closely looked at the idea before the student loan bond authority decided it was not necessary.

"It was an option we were kicking around, but at this point we don't feel we need it," said Debbie DeMuth, chief executive officer of CollegeInvest, Colorado's student loan bond authority. DeMuth said a recent review of the authority's cash flow situation showed the authority was in better shape than had been thought.

Under the Arkansas plan, the authority will negotiate a 12- to 18-month line of credit with the Arkansas Development Finance Authority. To pay for the loan, the state will divert $80 million of the roughly $300 million invested in certificates of deposits that mature this summer, according to a spokeswoman for the state treasurer's office. Final action by the state finance board is expected at its May meeting.

"Our world has been turned upside down," said Tony Williams, director of the state's student loan authority. "This will allow us some time for the bond market to stabilize, and for Congress to take action that we hope will open up some other funding avenues."

Williams said that the student loan authority had planned to close on a bond issue between $250 million and $270 million in February or March, but the authority was unable to because of the ongoing market turmoil.

Last year, student lenders sold about $60 billion of student loan-related securities, of which roughly 20% were tax-exempt and issued by state-level agencies and nonprofits. But since the beginning of the year, new issuance has evaporated as more than 50 lenders of federally guaranteed loans and about 20 private student loan issuers have suspended their lending activities, raising questions about the availability of education loans for students enrolling in school this fall.

Arkansas' move comes as Congress is close to approving legislation that would, among other things, give the Department of Education enhanced powers to purchase loans issued by state-level authorities through the Federal Family Education Loan program.

Senate action on a bill introduced by Sen. Edward Kennedy, D-Mass., could come as early as tomorrow, and follows easy passage earlier this month of a similar bill in the House that was introduced by Rep. George Miller, D-Calif., sources said. The House bill would allow the education department to purchase loans from lenders "only if doing so would not result in a net cost for the federal government."

In his weekly radio address Saturday, President Bush urged Congress to quickly consider approving the legislation to ensure that a "slowdown in the economy shouldn't mean a downturn in education opportunities."

"Congress needs to pass legislation that would give my administration greater authority to buy federal student loans," Bush said in his address. "By doing so, we can ensure that lenders will continue to participate in the guaranteed loan program and ensure that students continue to have access to tuition assistance."

Matt Hamill, senior vice president of the National Association of College and University Business Officers here, said that the legislation is needed because there is no legal framework for the government to intervene if the credit markets aren't meeting student needs.

"There's a general consensus that current law isn't well suited for the market conditions that we're seeing," Hamill said.

But other experts on student loans said it would be hard to know how effective the legislation will be until is implemented. "The bill is not even in final form yet, so it's really hard to say how helpful it will be," said one source who asked for anonymity.

The legislation comes amid calls from lawmakers for immediate action to help stem a looming student loan crisis. At a hearing earlier this month, Senate Banking chairman Christopher Dodd, D-Conn., called on the Bush administration to instruct the Treasury Department's Federal Financing Bank to "help prime the pump of liquidity" by purchasing packages of student loans from lenders.

In a letter, Dodd also asked Federal Reserve chairman Ben Bernanke to allow Wall Street banks and other firms to buy student loan asset-backed securities and then use them as collateral to borrow from a $200 billion lending facility that the Fed launched last month to help resolve liquidity problems facing big Wall Street firms.

In response, administration officials said last week that they did not believe the Federal Financing Bank had the authority to purchase packages of student loans, but said they would work with the Senate to ensure prompt action on the Miller bill that would give the secretary of education authority to buy student loans made by private lenders.

 

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