Kentucky will pump $50 million into a state agency so it can resume issuing loans to college students as they begin fall classes.
Gov. Steve Beshear announced Friday that the state will buy a $50 million bond from the non-profit Kentucky Higher Education Student Loan Corp., usually referred to as The Student Loan People.
The “bridge loan,” as Beshear called it, will jump-start the agency's lending, which stalled Thursday after it ran out of money.
Beshear said The Student Loan People are in a “cash crunch” just as classes are about to begin, but the bridge loan will make it possible for the agency to “go about its business ... without interruption.”
By next Thursday, The Student Loan People will begin issuing about $35 million in loans to about 16,000 students.
Edward Cunningham, executive director and CEO of the Kentucky Higher Education Assistance Authority and The Student Loan People, said the agency will be able to accommodate all students who need loans.
Without the bridge loan, “we'd have a crisis on our hands,” Cunningham said.
Kentucky is thought to be the first state in the nation to take this approach to solve the student lending dilemma, which is affecting thousands of students across the nation.
Cunningham said he was already getting phone calls from his peers in other states asking: “How did you do it?”
The student loan process is in chaos across the country. The nation's three largest non-profit student loan agencies are at a standstill after running out of money.
Tom Howard, a state finance official, said the commonwealth could not legally lend money to the agency, so buying the bond emerged as the solution.
The final hurdle was cleared Thursday when the Student Loan People got a strong AA-credit rating from Fitch Ratings, one of the three major ratings agencies in New York.
Jonathan Miller, secretary of the finance and administration cabinet, said an A-rating was the minimum necessary for the bond sale to occur. The top rating would have been AAA.
The loan will have a term of 445 days and will be payable on Nov. 15, 2009, said James R. Ackinson, executive vice president of KHEAA and The Student Loan People.
The agency will pay a variable interest rate, currently at 3.32 percent, Cunningham said. At that rate, the agency will pay about $1.9 million in interest in addition to the $50 million principal.
The bond sale must be approved by two state bodies: the State Property and Building Commission, an executive branch panel that will meet Monday, and the General Assembly's Capital Projects and Bond Committee, which will meet Tuesday.
Ackinson said the agency will need Wednesday to handle a heavy volume of paperwork associated with the bond.
Cunningham and Ackinson estimated that in the 2008-2009 academic year The Student Loan People will lend about $500 million to about 110,000 students.
The average yearly loan will be $4,500, split into equal payments of $2,250 for the fall and spring semesters.
As the loan process begins again, the agency will get reimbursements through a new federal program designed to be a one-year remedy to the lending crunch.
The national student loan crisis has been caused by at least two factors. One is a new federal policy that reduced the profit that private lenders could make on student loans, causing many of them to quit giving the loans.
In addition, the credit crisis, seen most notably in the widespread foreclosures of home mortgages, has made investors wary of the student loan market. Lenders fear a slow economy could increase defaults.
In a related matter, Beshear said one of his priorities is to begin a comprehensive review of the cost of a college education in Kentucky.
“We're starting to price many Kentuckians out of the market,” Beshear said.
Tuition at Kentucky's public universities and community and technical colleges has gone up an average of 10 percent a year for the last 10 years and four times faster than the rate of inflation.
Many students have been forced to borrow increasing amounts to get through school, in some cases graduating $30,000 or more in debt.