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Gov. Steve Beshear announced Friday that the state will buy a $50-million bond from the Kentucky Higher Education Student Loan Corp., usually referred to as the Student Loan People.
The "bridge loan," as it is called, will jump-start the agency's lending, which stalled Friday after it ran out of money for loans. Kentucky's lending woes are part of a national student lending crisis.
"We're stepping in with an innovative financing solution that will solve the cash flow problems suffered by the state's loan agency -- and relieve any anxiety students have about their loans," Beshear said in a news release.
"College students shouldn't have to worry about the ups and downs of the national credit industry as they attend school to pursue their dreams and develop their careers," Beshear said.
"With this influx (of funds) we are confident that every student who needs a loan will receive one," the governor said.
Tom Howard, a state finance official, said Kentucky is believed to be the only state to use this method to restore lending funds to its student loan agency.
Howard said the state could not legally lend money to the agency, so buying the bond emerged as the most workable solution.
The final hurdle was cleared Thursday when the Student Loan People got a strong AA- credit rating from Fitch Ratings, a ratings agency in New York. This exceeded an A rating, the minimum necessary for the bond sale.
With the bridge loan, the agency can start making loans as soon as Thursday, said James R. Ackinson, executive vice president of the Kentucky Higher Education Assistance Authority and the Student Loan People.
Right away, he said, the agency will lend about $35 million to about 16,000 students.
The loan will have a term of 445 days and will be payable on Nov. 15, 2009.
The agency will pay a variable interest rate, currently at 3.2 percent. Ackinson called this "a good borrowing rate for us."
At that rate, the agency will pay $1.9 million in interest in addition to the $50 million principal.
The bond sale must be approved by two state bodies: the State Property and Building Commission, an executive branch panel that will meet Monday, and the General Assembly's Capital Projects and Bond Committee, which will meet Tuesday.
Ackinson said that the agency will need to devote Wednesday to handling a heavy volume of paperwork associated with the bond.
Ackinson estimated that in the 2008-2009 academic year the Student Loan People will lend about $500 million to about 110,000 students. The average yearly loan will be $4,500, split into equal payments of $2,250 for the fall and spring semesters.
As the loan process begins again, the state will get reimbursements through a new federal program designed to solve the national student loan crisis.
Beshear said the bond "represents the state's most important investment" because it will continue the availability of low-cost student loans that are crucial for educational opportunity and economic well-being.
The national student loan crisis has been caused by at least two factors. One is that new federal policy reduced the profit that private lenders could make on student loans, thus causing many of those lenders to stop giving the loans.
In addition, the credit crisis, seen most notably in the widespread foreclosures of home mortgages, has made it harder for many students to qualify for loans.
Reach Art Jester at (859) 231-3489 or 1-800-950-6397, ext. 3489.
To see more of the Lexington Herald-Leader, or to subscribe to the newspaper, go to http://www.kentucky.com. Copyright (c) 2008, The Lexington Herald-Leader, Ky. Distributed by McClatchy-Tribune Information Services. For reprints, email tmsreprints@permissionsgroup.com, call 800-374-7985 or 847-635-6550, send a fax to 847-635-6968, or write to The Permissions Group Inc., 1247 Milwaukee Ave., Suite 303, Glenview, IL 60025, USA.
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