State approves student loans line of credit
Posted on Thursday, May 29, 2008
The state Board of Finance signed off Wednesday on granting a line of credit of up to $ 80 million to the Arkansas Student Loan Authority to make sure Arkansas college students can obtain loans through the authority.
The money will come from state funds that the board otherwise would invest in six-month certificates of deposit in Arkansas banks.
The board will set the interest rate on the money every six months, said Mac Dodson, president of the Development Finance Authority. He negotiated the terms of the loan. The board set the initial rate at 2. 03 percent.
The board also decided to seek 2. 03 percent from banks for $ 110 million in state funds to be invested through the board in six-month CDs.
The board makes such decisions in its role as overseer of the investment of idle state funds.
The student loan authority sought the line of credit to give it the ability to make loans to students while waiting for bond markets to stabilize. A market collapse scrubbed the authority’s planned $ 250 million to $ 270 million bond deal earlier this year to fund the program for 18 months.
Last month, the board tentatively approved the loan and directed Dodson to negotiate terms.
The authority funded about $ 70 million of the $ 470 million in student loans made in the 2007-08 school year for students to attend Arkansas colleges and for Arkansas students to attend colleges in other states, according to authority officials. As of March 31, the authority reported 47, 159 borrowers having an average balance of $ 12, 959.
Tony Williams, director of the authority, told the board that legislation recently passed by Congress and signed by President Bush “should provide a little more comfort for the state” so that “we should be able to pay this back in 18 months.” The law allows any student loans originated for the coming academic year to be sold to the federal government in the fall of 2009, “which is the time we will be paying back these funds. That would provide us with liquidity to pay the state back if we are not able to refinance the students through bonding,” he said.
Williams said how much of the $ 80 million the authority will tap will depend on the markets and additional guidance from the U. S. Department of Education.
“We will definitely be using these funds probably beginning next week for summer school loans,” he said. “We have a need for the money immediately.” Williams said he expects the authority to use at least $ 50 million of the line of credit.
No state student loan organization across the nation has completed a bond deal so far this year, he noted.
Students in the United States have lost access to more than $ 6. 7 billion a year in education loans after private lenders fled the market, spurring schools to turn to the U. S. Education Department’s Direct Loan Program.
Dozens of lenders stopped making federally guaranteed loans because the U. S. cut subsidies, and investors hurt by the subprime mortgage crisis shunned bonds backed by student loans.
Dodson said he expects the loan to close next week. State officials are waiting for the attorney general to issue an opinion that the board has authority to enter into this deal, he said.
Student loans issued through the authority are 97 percent guaranteed by the federal government, he said. The loans have had a 10 percent default rate, he said.
At the end of the 18-month period for the loan, the board will be able to, among other things, leave the student loans in trust or sell them, he said. Historically, interest rates for student loans probably have been higher than the rates the board received from CDs at state banks, he said.
The board OK’d state Banking Commissioner Candace Franks’ recommendation to seek 2. 03 percent for $ 110 million in state funds to be invested through the board in six-month CDs in banks. Autumn Sanson, chief investment officer for the state treasurer, said the rate would earn the state about $ 1. 1 million.
In February, the board decided to seek 2. 87 percent from banks for $ 150 million in state funds invested through the board in six-month CDs. A 2. 87 percent rate on the $ 110 million would have earned the state $ 1. 5 million, Sanson said.
Through the board, the state invests $ 300 million annually in CDs in banks across the state.
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