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Agency has $300m for college lending

Loans available to Mass. residents

By Peter Schworm
Globe Staff / April 2, 2009
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The state's student loan authority, which was forced to halt lending last year amid deep turmoil in the credit markets, said yesterday it had secured $300 million for college loans for the fall semester.

The Massachusetts Educational Financing Authority, a nonprofit agency that uses bond financing to make college loans, said the funds are part of the $400 million it obtained in September to issue loans for this academic year.

The private loans will carry a 7.75 percent fixed rate, substantially lower than many private college loans and the federal government's 8.5 percent rate on loans for parents, said Thomas Graf, the authority's executive director. The authority will not issue government-sponsored student loans, as it has in the past, after failing to attract bond investors. But families can obtain those loans through their college or other third-party lenders.

Graf said that like many private lenders, the authority will tighten eligibility for loans to reduce the risks of default. "We could not have raised funds without tightening our standards," he said. "Last year was a difficult season for us, and it took us a while to crack the market."

Governor Deval Patrick, who announced the financing at Braintree High School yesterday, said in a phone interview that persuading investors to finance the loans was difficult and that securing the money in a tough economic climate represented a breakthrough. Just two other state student-loan agencies were able to obtain financing last year, Patrick and Graf said.

"Education is our calling card," Patrick said. "People know that, even in the bond market."

College officials welcomed the development, which comes as many students and parents are beginning to review financial-aid awards to make their college decision. The financing is seenas a reliably less expensive alternative to other private loans.

"This is wonderful news," said Eileen O'Leary, director of financial services at Stonehill College. "They are probably the best alternative loan lender I can think of."

In contrast to the authority's fixed-rate loans, many private lenders offer variable rates with no cap, specialists said. Last academic year, the authority lent at 6.39 percent interest, thanks to its ability to issue tax-exempt bonds.

State residents and students who attend Massachusetts colleges are eligible for the loans.

O'Leary and other financial-aid specialists predicted that demand for private loans will rise this year, as families whose savings and investments have been sapped by the recession turn to borrowing to pay college bills. The availability of home-equity loans, a once-popular method to raise tuition money, has declined sharply, specialists added.

Paul Reville, the state's education secretary, said the authority's return to the lending market was a heartening development that would help put college within reach.

"It's crucial to make colleges a viable possibility for as many students as possible, in light of these financial times when people tend to lose hope," he said.

Over the past decade, families have increasingly turned to private loans to help pay for college. In 2007, they accounted for 24 percent of all education loans, up from 6 percent a decade before, according to the College Board. But last year private-loan volume declined slightly, even before the credit crisis sharply limited funds, according to a board survey released in the fall.

The state recently provided another $270 million in tax-exempt bonds to the authority for future loans, but Graf said it is too early to predict demand. The authority was able to land this year's money, he said, because of a strong repayment record and backing from the state.

The authority lent $500 million in the 2007-2008 school year, $400 million of which was in private loans. Last spring, the authority announced it would not be able to provide government loans, and, in the summer, it said it could not attract financing for private loans either. The news sent some 40,000 families who had relied on loans from the authority scrambling for alternatives that were in many cases more expensive.

But private lenders said their terms are often more favorable than the authority's.

Martha Holler - a spokeswoman for Sallie Mae Inc., the nation's largest private student lender - said interest rates currently range from 4.5 percent to 14.5 percent.

Peter Schworm can be reached at schworm@globe.com.