No funds to lend to 40,000 students
State authority runs dry as start of college nears
The Massachusetts Educational Financing Authority yesterday said it will not be able to provide student loans this fall for the first time in its 26-year history, leaving more than 40,000 families without an important source of tuition funds just weeks before college classes begin.
The nonprofit lending authority, which last school year provided $510 million in loans, said it has been unable to secure funding to provide private student loans due to the ongoing turmoil in the nation's credit markets. The agency had already disclosed in April that it would no longer offer federally backed student loans.
It is now contacting the tens of thousands of students to whom it has made loans in the past, urging them to seek other options.
"As a result of our problems and the continued dislocation of the capital markets, we have been unable to raise funds for the coming academic year," said Thomas M. Graf, the authority's executive director.
The news surprised some of the authority's customers. Lois Rosenthal of Winthrop was counting on a loan from the authority being available if she needed to borrow money for her daughter's tuition at Simmons College.
"I'm a little dismayed to hear that they won't have money, because it's a jungle out there, getting private loans," she said.
Just four weeks ago, the authority was hopeful it would find funding for private student loans by the end of July. It abandoned that hope after its bond insurer faced a possible downgrade in its credit rating, which would have driven up loans rates.
Graf acknowledged that some families are now facing tight deadlines, with tuition bills due in August. He said his agency will try to secure funding to provide loans for the spring semester.
"We will continue looking for money," Graf said.
The authority has set up a toll-free hotline to offer advice, 800-809-0571, and is encouraging families to seek federally backed loans first, then to shop for private loans, based in part on the recommendations they receive from schools. Federally backed loans have certain advantages, including offering fixed interest rates and subsidized rates for students who show financial need. The terms of federal loans can also be better, financial aid specialists said, and federal loans may be easier to consolidate later.
The Massachusetts authority was an attractive source for many schools and students because it offered low fixed rates, while banks and other lenders typically offer either higher rates or variable rates. As with a mortgage, a low variable rate can be attractive in the short term; however, if a family or student were to carry a loan for 15 years, interest rates could rise and payments could jump during the life of the loan.
Last year, the authority's 20-year private loan rate was 6.39 percent. Many banks offer rates linked to the prime rate, which last year at this time was 8.3 percent, according to bankrate.com. Prime, the rate banks offer their best customers, today is just 5 percent. But loan rates are tiered, based on borrowers' credit scores. The authority offered its best rate even to people with less-than-perfect credit, Graf said.
The authority was created in 1982, after local colleges urged the Legislature to create an agency to help families cope with costs. The authority does not rely on state funds for its lending, but rather raises money in the bond market.
The agency's loans were available to Massachusetts residents attending school here and across the country and to out-of-state students attending college locally. Private loans - $14,000 per loan, on average - represent 75 percent of its business.
Across the country, more than 50 lenders have stopped making federal or private student loans this year, largely because of the turmoil in the nation's credit markets that began with the subprime mortgage crisis last summer.
Nonprofit student lenders were hit when the source many used to raise money for loans, auction-rate bonds, suddenly stopped trading on Wall Street in February, as investors feared losses. Separately, changes in federal law cut the fees lenders could earn for making government-guaranteed loans, prompting many to leave the market.
College financial aid officers and student lending officials say there are loans to be had; it just takes more work to find it.
"I know there's some panic out there, but funds are available," said Shelley Saunders, vice president for strategic services at American Student Assistance, a Boston-based firm that guarantees federal loans in Massachusetts.
The authority has $1.5 billion worth of loans on the books that it continues to service. It also provides the savings plan for college tuition that is managed by Fidelity Investments.
In the near term, Graf is concerned about Bay State students getting access to funds.
"Their ability to get student loans, from my standpoint, is unclear," he said.
Beth Healy can be reached at bhealy@globe.com. 