MOHELA could originate 10 percent of Mo. loans
Published March 18, 2008
The Missouri Higher Education Loan Authority would be the originator of $200 million in federal student loans under a bill in the Missouri Senate.
Sen. Rob Mayer, R-Dexter, authored the bill that, if passed, gives MOHELA the authority to originate 10 percent of all student loans in Missouri.
MOHELA and Missouri banks will both benefit from the bill, Mayer said.
“I think it would be good for all parties involved in student loaning industry,” he said.
Mayer said if MOHELA increases its financial stability in the long term, it will provide a source for more loans for students seeking higher education in Missouri.
“We want to make certain that our students have a viable, reliable source of funding so they can go ahead and secure that money to get their education,” he said.
Mayer said MOHELA and the Missouri Bankers Association have negotiated for about three years to come to an agreement about student lending.
Since then, he said, MOHELA officials have approached him with worries that MOHELA profits would be declining, largely due to constraints on the nation concerning credit and subprime mortgage loans.
Those predictions proved to be correct. In the past nine months, MOHELA lost a total of $12 million, with three months remaining in the year, MOHELA Business Development Director Will Shaffner said. This is the first time in MOHELA’s 27-year history that it has experienced a loss of profit, he said.
Shaffner said every company in the student loan industry raises money through the bond market, where investors put money into it and then companies such as MOHELA take money and use it to buy student loans. The problem is the asset-backed securities look just like subprime mortgages, Shaffner said. Because of the subprime mortgage crisis in the United States, investors are afraid to invest in the asset-backed securities, causing MOHELA to have liquidity problems.
Investors look at the MOHELA loans the same way they do subprime mortgages. Since investors can’t tell the difference between the two, they choose to make no investment at all, Shaffner said.
When an investor chooses not to put money into a program, Shaffner said, the asset-backed securities defer to a higher interest rate, causing the cost of debt to increase. When cost of debt increases, MOHELA has to pay more money.
“When money gets tight, you just have to pay more for it,” he said. “It’s the rule of supply and demand.”
MOHELA’s financial problems could have a direct affect on students at colleges in Missouri. When students apply for loans, Shaffner said, they apply for federal loans. If students find more money is needed than what the government awarded them, they will turn to private lenders to make up the difference. MOHELA had its own private loan program but suspended it because of the financial situation the economy is facing. When MOHELA faces money problems, it cannot offer as many loans to students, he said.
MOHELA can originate Parent PLUS loans, GRADPLUS loans and consolidation loans but cannot originate Federal Stafford loans. When MOHELA cannot originate loans, they pay a premium to whatever bank they are getting the loans from.
If Mayer’s bill passes, it will allow MOHELA to be the originator of 10 percent of the $2 million student loan volume for Missouri college students.
“It will allow MOHELA to gain loan volume at a lower cost which will help secure the financial viability of MOHELA,” Shaffner said.
MU spokeswoman Mary Jo Banken said from 2005 to 2006, $2.2 million in Federal PLUS loans were through MOHELA. This type of loan is signed to parents of students.
Banken also said MU processes an additional $12 million in private alternative loans, and the majority of these are with MOHELA. Most loans are with the Federal Direct Lending Program because those offer the best interest rates.
The student financial aid office always examines the best lending options for students, she said.