DALLAS - The Arkansas State Board of Finance has given its final approval to an $80 million line of credit to the Arkansas Student Loan Authority so it can continue making loans to college students.

The authority had planned to make student loans for the next 18 months with the proceeds of a bond issue of $250 million to $270 million earlier this year, but turmoil in the debt market foiled those plans, said ASLA executive director Tony Williams.

"We've been in the same situation as the rest of the country, trying to complete a bond deal in an unsettled capital market," he said.

Williams said the student loan program is normally financed with the proceeds of unrated revenue bonds issued by the Arkansas Development Finance Authority.

"We typically have a bond issue every 12 to 18 months," he said.

Williams said liquidity should eventually return to the student loan bond market with the passage last month of the federal Ensuring Continued Access to Student Loans Act of 2008, also known as the Miller Act after its chief sponsor, Rep. George Miller, D-Calif., chairman of the House Education and Labor Committee.

The new law gives the U.S. Department of Education the authority to purchase loans issued by state student loan programs for the 2008-2009 academic year through the fall of 2009.

"Our intent is to refinance these loans with a bond issue in early 2009," Williams said. "The federal law would provide us with liquidity to pay the state back if we are not able to refinance the loans through bonding."

Williams said he isn't sure the liquidity problem in student loans has been resolved.

"Market conditions are very tough," he said.

Since the first of the year, the only student loan bond issue going to market was the Rhode Island Student Loan Authority's $64 million sale on May 1, according to Thomson Reuters. The Texas Higher Education Coordinating Board on Tuesday plans to issue $74 million of new-money general obligation student loan bonds and $74 million of refunding bonds.

Williams said he expects the line of credit from the state to be sufficient through the beginning of 2009. The first $50 million will be available for loans for the summer and fall semesters, with the remaining $30 million available in January for the spring 2009 semester.

Williams said he expects the ASLA to use at least $50 million of the line of credit.

"It looks like this money will take us through the beginning of the spring semester in early 2009," he said. "We hope to supplement those funds with recycling of loans from earlier bond issues, and with the liquidity provided by the new federal law. This line of credit is relatively risk-free for the state ... 97% of our loans are guaranteed by the federal government, and those loans have a default rate of only 10%."

The line of credit will come from approximately $300 million of state funds invested by the finance board in certificates of deposits set to mature this summer.

Mac Dodson, president of the Arkansas Development Finance Authority, told the board that the initial interest rate of 2.03% for the line of credit will be renegotiated with the Student Loan Authority every six months.

State Attorney General Dustin McDaniel has been asked to issue an opinion this week that the Finance Board has authority to provide the line of credit to the ASLA. The line of credit will be available when the opinion is issued.

 

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