House Financial Services Hearing Discusses Plight of Non-Profit Student Lenders

Below are excerpts of the September 18th House Committee on Financial Services hearing focused on "Auction Rate Securities Market: A Review of Problems and Potential Resolutions.  My notes below focus on the testimony of the two panelists representing non-profit student lenders and secondary markets:

• Ms. Tara Payne, Vice President for Corporate Communications, New Hampshire Higher Education Loan Corporation
• Mr. James Preston, President and Chief Executive Officer, Pennsylvania Higher Education Assistance Agency

Here are my notes from Ms. Payne's testimony (NHHELCO):

• 95% of public high schools and 34,000 students and parents rely on programs from NHHELCO
• Liquidity crunch and subsidy cuts have created risk of losing Center for College Planning in New Hampshire
• NHHELCO volumes for FY07:  $184 MM FFEL, $67MM in private loans
• $1.5 billion in outstanding bonds since their founding
• Auction rate market has been key source for student loans; issuers like NHHELCO can't raise funds now
• UBS, trusted financial adviser to NHHELCO, knew market was on verge of collapse while encouraging NHHELCO to extend its commitment to these auction rate bonds.  New Hampshire has brought fraud charges against UBS. 
• Private loans provide funding to close gap between financial aid and total cost of education - 6,000 students participated in NHHELCO program in 2007
  • Suspended alternative loan program in March 2008
  • In past, 28% of students were putting tuition on credit cards
  • In midst of surveying students to see how they are dealing with the situation
• NHHELCO has raised $94 million through support of community lenders and credit unions in New Hampshire to fund FFELP program this year

Here are my notes from Mr. Preston's testimony (PHEAA):

• Non-profit agencies have few options to raise needed funds
  • Collapse of auction rate market
  • Other financing sources closed
• ECASLA, passed in May, has been crucial to ensuring access to federal loans and last night it was extended for another year; however it is temporary solution and only applies to federal loans
  • Need to address underlying causes of current liquidity difficulties otherwise there will be continued instability in the student loan market
• PHEAA suspended origination and purchases of federal student loans in March
  • Cost of capital made it impossible to generate positive return on investment
  • Traditional sources of liquidity were withdrawn and just not available
  • Could not sustain unlimited losses
• PHEAA maintains $12 billion in outstanding debt obligations
  • Mix of taxable and tax-exempt securities
  • $7.4 billion in auction rate
  • Originates student loans and serves as secondary market for student loans
    • Purchase loans from originators at par plus reasonable premium
    • Enables hundreds of lenders to participate in federal student loan program
    • Not able to purchase their loans now, so therefore, smaller lenders' balance sheets filling up rapidly at these smaller lenders
  • Unable to issue new debt obligations; lack of investors, and price required is too high  
    • Credit ratings agencies expect debt issuers to put up significant capital to any new security, difficult without access to funds.
• PHEAA, in concert with two sister agencies, put forward a proposal to Treasury which seeks to assist investors, issuers and federal government
  
  • Core principles found in Treasury's plan to establish market for mortgage-backed securities as part of its rescue of  Fannie Mae and Freddie Mac
  • PHEAA proposal does same thing for student loans
    • Less risky to government since already 97% guaranteed by federal government
  • Treasury requires new statutory authority for Treasury to purchase student loans
• Urges Congress to give Treasury this authority by adopting H.R. 5914, sponsored by Kanjorski