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Student-loan firm Teri seeks court protection

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Bloomberg News / April 8, 2008

WILMINGTON, Del. - The Education Resources Institute Inc., the Boston lender that says it's the largest nonprofit, private guarantor of student loans, has filed for protection from creditors.

Known as Teri, the company filed yesterday for bankruptcy protection in Boston while it reorganizes, listing debt of as much as $1 billion and assets of more than $1 billion in its Chapter 11 petition.

The company helps students fill the funding gap when government-backed loans aren't enough to cover the costs of college.

"Because of the recent turmoil in the financial markets, demand for bonds backed by student loans has evaporated," the company's chief executive, Willis J. Hulings III, said in court papers.

The lack of investor demand has made it harder for student lenders to raise money to finance their operations. CIT Group Inc. and NorthStar Education Finance Inc. last week said they will stop making new loans to US students because lending costs have soared. Only two student loan companies sold debt in the asset-backed securities market last month, and no new private-loan bonds of the type that Teri specializes in have been bought this year.

In response to financial troubles in the late 1990s, Teri agreed to let First Marblehead Corp., the Boston-based provider of student loans, act as its exclusive agent in processing private education loans for various banks.

The nonprofit guarantees about 20 percent of private student loans, including $4 billion in new loans last year, Hulings said. The nonprofit's grant and research efforts will continue unaffected, he said.

Teri and First Marblehead focus on private student loans, which are debts taken on to fill the difference between what government-backed loans cover and costs of college. Teri had total guarantees outstanding of $16.2 billion at the end of 2007, according to Moody's Investors Service.

A Moody's downgrade last month of Teri to a noninvestment-grade rating tripped a contract clause that allowed a lender, not First Marblehead, to ask Teri to put aside more cash to cover guarantees, Hulings said. Teri guarantees loans held by lenders that are not packaged into bonds.

First Marblehead also has used Teri for guarantees on some of the debt it packages into securities. Because of the turmoil in the credit markets, First Marblehead hasn't been able to arrange securitizations, adding to Teri's financial problems, according to court papers.

First Marblehead acquired Teri's database and loan-processing operations in 2001.

Defaults among student borrowers have increased as the economy has soured, driving up Teri's costs. The company must buy back loans that go bad.

And investors have been demanding higher yields, even on bonds backed by government-guaranteed student loans.

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