JEFFERSON CITY — A generation ago, when a college education cost just a fraction of what it does today, students nonetheless faced a problem getting financial aid.
Simply put, the supply of student loans was not keeping up with the demand.
So many states, Missouri included, created quasi-governmental student loan authorities. Their mission was to buy student loans from the originating banks, giving the banks the capital needed to make more student loans.
These nonprofit governmental agencies also helped control the costs of student loans because they could finance themselves through bonds and direct part of their earnings back toward student aid instead of stockholders.
By most accounts, the Missouri Higher Education Loan Authority, or MOHELA, has grown from its birth in 1981 into one of the most successful of its kind. MOHELA was ranked 13th nationally — and fourth among state-based student loan agencies — in the value of its federal loans as of September 2004, the most recent figures available from the U.S. Department of Education.
And the discounts it offers to student borrowers also rank near the top.
In fact, “MOHELA has probably the best set of borrower benefits in the nation,” said Brett Lief, president of the Washington, D.C.-based National Counsel of Higher Education Loan Programs, which represents both nonprofit and for-profit student loan holders as well as schools and others involved in the student loan industry.
Gov. Matt Blunt is proposing that Missouri cash in on MOHELA’s success — selling its assets to the best bidder and using the $425 million in projected proceeds for a university construction boom and new endowments for scholarships, professors and business enticements.
The benefits are tangible: 20 new or improved buildings at campuses across the state in high-tech fields, 40 endowed professorships, $5 million annually in new scholarships.
The Missouri Economic Research and Information Center projects the proceeds from MOHELA’s sale to result in $554 million annually in new economic activity and spur the creation of 4,880 jobs annually paying an average of $45,314. The center says all of that economic activity should return nearly $38 million annually in taxes to state general revenues.
The costs of the proposed sale are less tangible. And the question that state lawmakers will have to consider is whether they outweigh the benefits, particularly in the long run.
Much of the immediate concern has focused on whether the sale of MOHELA would result in higher interest rates to Missouri students and their families. The federal government sets rates for the loans it backs, meaning that the common Stafford loan, for example, would have an interest rate of 5.3 percent for college graduates no matter who holds the loan.
But student loan agencies can offer incentives based off that common starting point.
For example, MOHELA advertises on its Web site that graduates who use an electronic payment schedule will immediately get a reduced interest rate of 3.3 percent. If that loan is guaranteed through the state Department of Higher Education, that rate drops to 2.8 percent.
Few can match a rate that low. But almost every loan entity offers some kind of discount.
Sallie Mae, a for-profit company that is the nation’s largest student loan holder, doesn’t offer an immediate interest rate discount like MOHELA. Instead, if graduates make on-time payments for 33 months, they receive cash or credit equal to 3.3 percent of the amount of their original principal on the loan, company officials said.
Part of the reason for-profit companies like Sallie Mae offer such incentives is to compete against nonprofits like MOHELA. That’s why critics worry students will get fewer breaks on loans if MOHELA is sold to a for-profit company.
But officials at Sallie Mae reject such assertions. They say there still will be plenty of private sector competition — the driving force of keeping prices low in any industry.When entities like MOHELA were created, “You didn’t have the number of vendors competing in the marketplace like you do now,” said Sallie Mae spokesman Tom Joyce. Now, “People are basically knocking each other over at the campus gates to get to this business, and that means students are the beneficiaries.”
Yet some economists remain concerned about the market effects of privatizing state-created student loan agencies. If MOHELA is sold to a big company, it could reduce student-loan competition, not just in Missouri, but nationally, said Sandy Baum, an economics professor at Skidmore College in Saratoga Springs, N.Y., , and a financial aid analyst for the College Board education association that produces the SAT college entrance exam.
Blunt said he is committed to keeping interest rates low for students if MOHELA is sold. Lawmakers have expressed similar desires, with some suggesting they could write such parameters into any legislation authorizing MOHELA’s sale. Liefsaid doing so likely would lower the price that MOHELA would fetch on the market.
He also raises another factor for elected officials to consider. College tuition costs are continuing to rise, and college enrollment is expected to hit a record high in several years, he said, meaning the demand for student loans should grow significantly. That means the value of MOHELA — and nearly any student loan entity — should continue to rise.
“It’s a good time to be a buyer” of a student loan agency, Lief said, but “not a good time to be a seller, because these assets will only become more valuable.”