College loan program laced with history

Friday, February 10, 2006 | 12:00 a.m. CST; updated 11:06 a.m. CDT, Sunday, June 29, 2008

Behind the controversy over Gov. Matt Blunt’s effort to sell the state’s college loan program is a complicated process with a decades-long history in Missouri.

In 1965, in an attempt to help more students attend college, the federal government created the Federal Family Education Loan Program. It was to serve as an assurance to lending institutions for college loans to students, most of whom had no credit history and made poor candidates for traditional loans. Under the program, the students could borrow for college without posing a risk to lenders.

State programs, like the Missouri Higher Education Loan Authority, or MOHELA, facilitated those federally backed loans.

“We ensure student loans as an agent of the federal government, and we take the risk out of lending,” said Keith New, director of communications for the Pennsylvania Higher Education Assistance Agency, or PHEAA.

Since the creation of this guarantor program, students have borrowed billions of dollars.

MOHELA alone services loans for more than 500,000 borrowers. Organizations like it and PHEAA exist to help students, but the maze of paperwork needed to acquire a student loan can be daunting. The complexity of the process, however, can be broken down.

“Essentially, there are four groups involved in the process: guarantors, secondary markets, lenders and servicers” New said.

The groups on the front end, the guarantors, provide an insurance to potential lenders. They bid on student loan portfolios from a variety of lenders and make it possible for students, who have no credit history, to borrow money.

Groups like MOHELA fall under the secondary market category. The primary function of a secondary market is to provide liquidity for a specific industry, said Will Shaffner, MOHELA’s associate business director for development.

“There are secondary markets for all kinds of industries, and we happen to be a secondary market for student loans,” Shaffner said.

Essentially, MOHELA purchases the loan notes that have been issued by banks and issues bonds to cover the debt payments to the banks.

Purchasing the loan notes from lenders provides them with a constant source of fresh capital that allows them to offer more student loans.

As a secondary market, MOHELA annually buys more than $1 million in student loans and is the 12th largest holder of them in the country, Shaffner said.

Lenders make up the third group. They are the organizations that provide the resources for the loans students take out.

The fourth group comes in the form of servicers. These groups administer the loans and account for them for the life of their existence. MOHELA works as a servicer and does contracting with private servicers.

“A lender who has decided to fund a loan may not have the will or the staff available to perform the necessary due diligence on a loan,” Shaffner said.

This “due diligence” is a series of actions that have to be taken on a student loan and includes checking student enrollment status, taking on collections and issuing checks, among other things. Servicers also make part of their money from lenders, who pay fees to servicers for administering these accounts. MOHELA, however, as a nonprofit does not charge its lenders for these services.

Private loans also serve as an option for students, but it isn’t one that New or his counterparts recommend.

“Student loans are federally regulated and, therefore, protect students,” New said. “Private loans are not subject to disclosure regulations, and students and their parents may not realize the high interest rates they’ll have to pay.”

However, New acknowledges that with rising tuition rates, private loans are increasingly becoming an important option.

Part of the disagreement surrounding the MOHELA sale involve the benefits to students and the implications for interest rates. Critics of the sale argued that rates were sure to go up if the loan notes are purchased by a for-profit company and beholden to its stockholders to make money.

Had all of MOHELA or the Pennsylvania loan authority been sold, it would not have meant the end of student loans, New said. But, he said, the elimination of MOHELA would be a clear loss.

“In the student aid industry, it doesn’t benefit anyone for only profit-making companies to exist,” said New. “We need for-profits, but we also need nonprofits to ensure that students receive the best services.”

Shaffner agreed, saying any excess revenue MOHELA receives goes back into the program to help borrowers and lenders.

“We are a Missouri success story,” Shaffner said. “We don’t cost Missouri taxpayers anything, and we provide a benefit to many Missouri families.”

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