Ark. Student Loan Authority may have no money to lend next year

LITTLE ROCK Created three decades ago to ensure access to education funding for Arkansas students, the Arkansas Student Loan Authority may not issue student loans at all this fall.

The nonprofit state entity that funded $186 million in student loans last year receives all its funding from the sale of bonds backed by student loans. But investors spooked by recent credit problems that began in the subprime mortgage market have so far been unwilling to buy bonds from ASLA or lenders nationwide even though they are 97 percent insured by the federal government.

"We are at a point to where we may have to suspend originating loans or reduce loan purchases due to the problems in the capital markets," ASLA Executive Director Tony Williams told the Arkansas News Bureau last week.

The authority had hoped to close a bond deal last month for about $250 million, which would have allowed it to operate for about 18 months, but the deal is still pending.

"Receiving funding has never been a question in the past," Williams said. "It's definitely a question now."

Some lenders already have decided they won't make loans in the next academic year. More than 47 lenders nationwide responsible for about 12 percent of the new loan volume have stopped participating in the Federal Family Education Loan program, a cornerstone of the financial-aid system, according to Mark Kantrowitz, publisher of Finaid.org, the most popular Web site for student financial aid information.

Williams said ASLA will have to make a decision by early June so that financial aid offices at colleges and universities in Arkansas know what the authority's participation will be for the 2008-2009 academic year.

Officials at the University of Arkansas in Fayetteville and the University of Central Arkansas did not return calls seeking comment.

Williams estimated ASLA had $177 million in investments at the end of February, but a "large portion" of that money was committed to making principal and interest payments to bond holders, he said.

ASLA's current funding difficulties have prompted the authority to explore obtaining funding from private banks. Whether that is practical will depend on the interest rates banks are able to offer, Williams said.

It would be somewhat of a reversal in such business relationships. The largest piece of ASLA's business is acting as a secondary market for banks by purchasing from banks the student loans they originate.

In another scenario, private banks would do all of the lending next year, Williams said.

"We have received commitments from banks that if we're not in the position to fund loans, (they) are willing to accommodate those students," he said without naming any of the institutions.

Many banks will be unwilling to step into that role because of the relatively new College Cost Reduction and Access Act, which limits the yield lenders can earn on student loans, Kantrowitz said.

"If banks can't sell (to a secondary market), they either have to decide whether to hold the loans to maturity, which they don't want to do because the returns are negligible, or they leave," he said.

Simmons First National Bank is one of the largest student loan lenders in Arkansas, originating between $55 million and $60 million in loans a year, which it later sells to the secondary market, according to senior vice president Shirley Crow.

Crow did not say whether Simmons made a commitment to ASLA, only that pending legislation could determine the future of its student loan program.

The U.S. House of Representatives will consider a bill this week that would allow the federal government to provide a secondary market to private banks.

The bill would give the Department of Education express legal authority to advance funds to guaranty agencies to act as lenders of last resort and also allow the agency to purchase existing loans from private lenders to give them the capital to make new loans.

The student lending problem has not reached crisis level yet, but could within a year, Kantrowitz said.

"If there's not a thawing of the capital markets or if there's not government intervention, we're going to see 15 to 25 lenders left at the end of the (2008-2009) academic year, compared to 2,700 now," he said.

Some of the remaining lenders will increase their market share, while others won't, he said. To fill the gap, Kantrowitz predicts many schools will switch to the Direct Loan program, in which the federal government makes the loans using money from the U.S. Treasury.

The bill the House is to consider, like a companion Senate measure, would increase the amount of federally backed loans students could take out from $23,000 to $31,000 for students still dependent on their families and from $46,000 to $57,500 for students who are on their own.

If ASLA is unable to make loans next year, more than $500 million in loans outstanding will enable the authority to continue offering its student outreach services, which include providing free financial information to students as well as free scholarship searches, Williams said.

"We're in a situation where if we could not make loans for the next four to five years, we would still be a financially stable organization during that time," Williams said. "We believe within the next year that the bond markets will restabilize and that won't be an issue."