State agency can't provide private college loans

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July 28, 2008

By Glen Johnson The Salem News Mon Jul 28, 2008, 03:42 PM EDT

BOSTON — A state lending authority that provided more than $500 million worth of college financing last year said Monday it won't be able to offer the bulk of its loans this year because of turmoil in the financial markets.

The Massachusetts Educational Financing Authority said it would not provide private loans, which accounted for 80 percent of MEFA's business last year.

The authority had said in April it couldn't support student applications for the federally backed Stafford Loan program. MEFA offered "borrower benefits" that made the loans less expensive than those obtained from private banks.

"As a result of our problems and the continued dislocation of the capital markets, we have been unable to raise funds for the coming academic year," Executive Director Thomas Graf said.

The agency is encouraging the 40,000 students and families it has worked with in the past to seek federal loans on their own and then private loans through banking institutions. The authority also is establishing a hot line to offer advice for students and the families.

Spokeswoman Jessica Belt said MEFA hoped to be able to provide some financing later this year, perhaps for second-semester tuition bills or in Spring 2009. Most institutions require first-term payments by Aug. 15.

The news is the latest blow to those trying to cope with record college costs. With many private schools now nearing $50,000 a year for room and board, families have been scrambling for scholarships and loan packages to meet their obligations.

The student-loan market began to face problems late last year, falling victim to the same subprime mortgage crisis that befell many homeowners. A lack of investor interest dried up demand for so-called auction-rate bonds, the kind of long-term debt many lenders used to underwrite student loans.

Since then, MEFA and other similar entities have had problems refinancing their old auction-rate bonds.

Graf said the authority had to reverse itself on private loans because the agency's bond insurer faced a possible downgrade in its credit rating. That, in turn, would have increased the cost of floating new debt.

MEFA, a nonprofit agency with about 50 employees, continues to run other educational programs, including the U.Plan, a college savings plan it manages jointly with Fidelity Investments, Belt said.

The U.Plan allows families to lock-in future tuition at current rates at 80 participating Massachusetts colleges and universities. About 36,000 families have enrolled in the U.Plan since 1995, with nearly $3 billion now invested.

In addition, MEFA has about $1.5 billion in past loans outstanding that it continues to service.

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