State loan agency MOHELA suffers first operating loss

by Christopher Tritto and Kelsey Volkmann

For the first time in its nearly 30-year history, the Missouri Higher Education Loan Authority (MOHELA) has suffered an annual operating loss.

The state-chartered student loan agency lost $2.2 million in fiscal 2008, according to a preliminary financial report Ray Bayer, MOHELA’s executive director, presented to the agency’s board Friday.

The authority is feeling the squeeze of the credit crunch and the fallout from the auction-rate securities meltdown in February.

MOHELA also transferred $233.8 million to the controversial Lewis and Clark Discovery Initiative, a fund Gov. Matt Blunt created to devote some of the money that had been slated for loans toward the construction of campus buildings instead.

The payment was part of an agreement that calls for the authority to transfer $350 million over the next six years to the state college construction program. In June, the authority had to delay payment to the fund due to concerns the payment would strain the authority's weakened financial position.

Still, the agency was able to provide borrower benefits totaling $13.25 million in fiscal 2008 to students attending more than 150 colleges, universities and vocational schools. The agency, which has $5 billion in assets, also cut general and administrative expenses last year by $4.68 million.

In February, the authority suspended its loan consolidation and private lending services in the midst of the auction-rate securities debacle.

MOHELA issued bonds to raise money to buy student loans from originating banks to provide lower-cost services and most often, sold those bonds in the form of auction-rate securities, which treat long-term debt like short-term holdings. Every week to 35 days, holders of those securities sold them in bank-managed auctions that reset the interest rates on the securities for new buyers.

Roughly 70 percent, or $3.6 billion, of MOHELA's $5.1 billion loan portfolio is traded through auction-rate securities.

The difficulty can be traced back to the national subprime mortgage fiasco and the credit crunch it triggered last fall. That mess began spilling over into the student loan industry as wary investors lost confidence in asset-backed securities -- even those outside the mortgage market.

Then the $330 billion market collapsed in February when investors became alarmed at the prospects of corporate borrowers covering debt service on the securities.

And things aren’t going to get better any time sooner, MOHELA predicts in its latest report. It expects the environment is going to get tougher going forward as the entire student loan industry is suffering, potentially making it more difficult and expensive for Missouri students to finance their college educations.

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