Connecticut Student Loan Foundation Puts Guaranty Business on the Block; 6 Board Members Dismissed (Updated)

In a sign of consolidation in the federal student loan guaranty business, the Connecticut Student Loan Foundation (CSLF) has put their guaranty business up for sale, according to the Journal Inquirer.  As posted earlier on this blog, EAC, the designated federal loan guarantor in South Dakota recently sold their business to Great Lakes.  The CSLF has struggled in recent years and one board member, Michael Meotti, described the problems as growing more dire:

“But they just didn’t have a lot of success with their new business activities and the federal government has lowered the size of the service fees you can take out,” he said. “So you have an organization this is running out of cash and, by their own internal projections, by October will be in a position where they just can’t even make payroll.

“That doesn’t mean they don’t have over $100 million in a trust for lending, but they just can’t touch that,” he added. “The foundation has money to lend for next year if it needs it, but they may not have the cash flow to actually operate as an organization.”

The foundation's President Mark Valenti indicated that there had been expressions of interest in their guaranty business:

“We have had expressions of interest by large nonprofit agencies to acquire CSLF’s guaranty business,” the official said.

Valenti said confidentiality agreements prohibited him from disclosing the names of those entities, which he described only as having “economies of scale that do not exist at CSLF.”

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The turmoil at CSLF continued on Friday with Governor Rell dismissing her six appointments to the board after an audit of the foundation found the following:

"State auditors say it lost $24.5 million over the past five years while cutting staff and fighting foreclosure of its Rocky Hill headquarters.

At the same time, it authorized raises and bonuses for executives, costly golf memberships and parties, sports tickets and limo rentals."

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Based on recent data disclosed by the Department of Education, CSLF was the smallest of 35 guaranty agencies in the federal student loan program with $181 million in commitments for FY08, a 24.6% drop from their FY07 levels.  

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Update (March 19, 2009): 

Here is the letter that the President of CSLF sent to its school partners last week:

March 13, 2009

Dear School Partners:

Recent erroneous reports appearing in one media outlet have questioned the viability and business practices of the Connecticut Student Loan Foundation (CSLF).  Regrettably, this media outlet made no attempt to contact CSLF leadership or staff prior to publishing this information.  Had they done so the release of misinformation and inaccurate reporting could have been avoided.  We feel it is important to set the record straight.

First and foremost, CSLF has funding readily available to make Federal Stafford, Federal PLUS, and Federal Graduate PLUS loans for the 2009-2010 academic year.  In fact, CSLF presently has more than $150 million in funding which we are ready to lend to students.

Further, improving the services we offer to our clients remains a top priority.  We are nearing completion of a major system conversion that will provide state-of-the-art products and services to all of its clients.  These upgrades to our operational processes will help us continue to provide high-quality services to all members of the FFELP community.

CSLF is a non-profit organization dedicated to providing access to funding for higher education.  We are neither an agency nor a quasi-public agency of the State of Connecticut, and as such receive no funding from the State.  Additionally, CSLF has no debts or obligations that are a liability of the State.

Media reports also failed to make clear that the present challenges are solely in the guarantee component of CSLF and were not in any way created by CSLF’s spending, but rather by the current capital market crisis and cuts to student loan programs through the Higher Education Reconciliation Act of 2005 and the College Cost Reduction and Access Act of 2007.  CSLF is working diligently to address these challenges and it bears repeating: CSLF has more than $150 million in funding readily available to make Federal Stafford, Federal PLUS, and Federal Graduate PLUS loans for the 2009-2010 academic year.

In addition to regular internal audits conducted by independent reviewers, CSLF is also subject to oversight from a variety of State and Federal entities.  All of these evaluations and audits of CSLF, from our operating procedures and salaries to management of funds have consistently been positive and have reflected the diligence and commitment CSLF makes to its clients.  Recent reports to the contrary are unfortunately the result of incomplete data collection, inaccurate assumptions and a basic lack of understanding of how the student loan industry operates.  We will be making a concerted effort to educate all interested parties on the intricacies of our business as well as CSLF’s solid record of success.

Our record of supporting students in higher education has been one of success.  Since 2003 alone, CSLF has:

•    Made student, parent and consolidation loans in excess of $1.2 billion.
•    Provided “second chance” loans to individuals totaling more than $313 million.
•    Paid or waived fees on behalf of students amounting to more than $13.4 million.
•    Guaranteed more than 200,000 loans to parents and students amounting to over $1.7 billion and tens of thousands of loan consolidations amounting to over $1.1 billion.

CSLF remains focused on its mission of providing quality education loan products and services to students, parents, and business partners.  As we continue in our work, we will make every effort to ensure that the media, policy makers and most importantly our clients understand CSLF and appreciate the vital role we play in helping students access higher education.  We look forward to continuing our mission and are ready, willing and able to discuss at length CSLF’s operations, funding accounting, trust requirements or any other issues.

Sincerely,

Mark Valenti
President
Connecticut Student Loan Foundation

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Update (May 27, 2009)

The Hartford Courant is reporting that 9 of the 14 board members at the foundation have resigned
"after legislative leaders failed to grant their request for indemnity to protect them from lawsuits."  The article also noted the precarious financial condition of the foundation:

"Board members said Tuesday that the foundation, a nonprofit corporation that administers, guarantees, finances and serves student loans within the federal loan program, will probably run out of money before the end of the year."

The board chairwoman indicated that "Students will still be able to get loans, but they won't be able to get them from the Connecticut Student Loan Foundation."  As I have posted earlier, the current economics of the guarantee business will facilitate a wave of consolidation over the next several months. 

Comments

[Mariana Evica]

Additional context and perspective on the Connecticut Student Loan's position can gleaned by visiting http://cslf.wordpress.com - visitors may read responses from president Mark Valenti as well as a letter to the editor (un-published elsewhere) from Senior Vice President & CFO Diane Del Rosso.