Student loan authority may not get state aid
MEFA turns to large investors in its quest to raise $400 million
Financial help from the state appears unlikely for Massachusetts' student loan authority, which is pressing ahead with efforts to raise money the traditional way - in the public market.
The Massachusetts Educational Financing Authority has hired a new lead investment bank,
The nonprofit loan authority's former banker was UBS Financial Services Inc., which closed its municipal business amid the auction-rate securities scandal and has agreed to buy back $19 billion of those investments from customers.
The authority provided $510 million in loans to more than 40,000 students last year, but in late July it revealed that it would have no money for students this fall because it couldn't launch a bond offering in time. Demand for bonds issued by student lenders evaporated last fall as a result of the broader troubles in US credit markets.
MEFA's empty coffers sent students and families scrambling to find other loans just as tuition bills were coming due. The authority's private loans have been popular because they were offered at low, fixed rates: Many lenders offer only variable rates, which can rise unpredictably. The loss of MEFA as an option this year could cost families significantly more in interest payments over time.
Two last-minute proposals to assist the authority were floated last week by Governor Deval L. Patrick and state Treasurer Timothy P. Cahill, but both appear destined for dead ends.
Patrick had suggested that the state pension fund buy a portion of the planned bond offering. But Cahill opposed the idea, and the rest of the pension board has taken no action. A letter last week from the fund's executive director said buying the bonds directly would violate the $51 billion fund's investment policies.
As an alternative, Cahill proposed that the state back the student lender's bond offering, using taxpayer funds as collateral. That would require approval at a special meeting of the Legislature, but no such meeting has been planned, according to lawmakers and staff. Senate President Therese Murray declined to comment. The Legislature is slated to meet next in October.
Cahill's office said it is still pressing ahead on the treasurer's proposal.
Both the governor and Cahill got involved at the prodding of the Legislature, which took up the issue on the last night it was in session, July 31. MEFA's struggles have been unfolding publicly since spring.
Cyndi Roy, the governor's deputy press secretary, said the administration is continuing to work with the loan authority.
"Governor Patrick put a serious, viable proposal on the table and he remains actively engaged with MEFA on that and any other solutions that will help 40,000 Massachusetts families send their children to college this year," she said.
Most families are pursuing other options by now. A MEFA bond offering could take until early September to complete.
The governor has encouraged the state's colleges and universities to work together to help MEFA if they can. About 20 of them met last week, in person and some by conference call, to brainstorm.
One proposal in particular has potential - but possibly not until next year - according to people who were there. Some schools suggested reinstating a participation fund, under which schools set aside up to 6 percent of the loan amounts their students secured through the authority. The funds were a kind of insurance for bondholders, but the program was phased out several years ago.
Meanwhile, MEFA executives are hoping market forces and attention generated by the governor will help get their bond offering off the ground. One reason for optimism: New Jersey's Higher Education Student Assistance Authority on Aug. 7 completed a $350 million student-loan bond issue that was the first in the industry since May. If the Massachusetts authority gets a deal done, "For this year, it would be the largest all-private student loan deal," said Gary F. Santo Jr., a managing director at Fitch Ratings, a bond rating agency in New York. But he said it's too soon to say if the market is returning to health.
"It would normally be a good sign that the market may be improving for private student loans," Santo said. "However, it would depend on the structure and the terms, as well as the actual investors. Anything that might be unique to this transaction might not be replicable for other issuers."
The New Jersey bonds were offered at interest rates of 5.9 percent and 6.1 percent, according to Morgan Stanley, which also led that deal, along with
Beth Healy can be reached at bhealy@globe.com. 