Senators: Montana Higher Education Student Assistance Corporation must disclose financial records

Baucus, Tester note Congress has worked to make college more affordable for students

(WASHINGTON, D.C.) – Following Thursday’s news reports that the Student Assistance Foundation (SAF) was laying off 23 people, Montana’s U.S. Senators Max Baucus and Jon Tester today called for SAF and Montana Higher Education Student Assistance Corporation (MHESAC) to disclose their financial records and to take steps to ensure that students in Montana continue to receive their loans efficiently and effectively.

Text of the Senators’ letter follows:

April 25, 2008

Mr. Fred Flanders
Chair, Montana Higher Education Student Assistance Corporation

Mr. Jim Bell
Chair, Student Assistance Foundation

Ms. Lynn Morrison-Hamilton
Chair, Montana Board of Regents

Ms. Sheila Stearns
Commissioner, Office of the Commissioner of Higher Education

Dear Chairman Flanders, Chairman Bell, Chairwoman Morrison-Hamilton and Commissioner Sterns:

In recent weeks, SAF and MHESAC have asked for federal involvement to address concerns about availability of student loans.  SAF recently announced that it has decided to lay off 23 employees.  MHESAC has just suspended its loan consolidation activity.  In order to effectively respond to the needs of Montana’s students, we hope to learn more about the steps SAF and MHESAC have taken placing them in the position where they need to reach out for assistance.  We are comforted that, based on recent newspaper articles, and personal assurances from MHESAC and SAF, MHESAC has the necessary financing in place to provide student loans for Montana students in the upcoming academic year.  To date, Montana colleges and universities have not expressed problems with student access to financial aid. 

The national student loan industry has not been exempt from the turmoil in the U.S. credit markets, and many lenders are having difficulties securing the capital needed to finance student loans.  Congress passed student loan legislation to make higher education more affordable through increases in Pell grants and lower interest rates for student loans. Lenders from across the country have testified to Congress that the primary reason lenders are pulling out of the student loan business is because of the overall credit crunch.  The losses that MHESAC is facing are an effect of the volatility in the current markets and potential risk in types of securities.  Financing issues started with the housing crisis and have spilled over into multiple markets; the much publicized failure of auction bond markets is just one of them.  Many lenders—including MHESAC—have experienced losses as a result of failed auctions on bonds backed by student loans.  Lenders received lower rates on auction bonds.  As a result there may have been increased risk in excessive reliance on these bonds.  Concerns have also been raised regarding the entities’ lack of transparency and openness concerning its high-risk investing practices, lack of diversification of investment and exposure to losses.

Our primary concern has been, and continues to be, the affordability and accessibility of higher education for our Montana students.  Earlier this month, we, together with eighteen of our colleagues, sent a letter to Education Secretary Spellings and Treasury Secretary Paulson, asking that they take necessary steps to ensure access to federal student loans.  We also support current steps being taken to expand authority of the Department of Education as the lender-of-last-resort, providing the backstop to the private market.   In an effort to ensure Montana students will have adequate financial aid in future years, we encourage Montana universities and colleges to take steps to consider alternative lenders, including the option of facilitating students’ access to the Direct Loan Program. 

We will continue to keep a careful eye on the situation and assess alternative options to ensure Montana students have uninterrupted access to financial aid, this coming year and for years to come.   In order to effectively assess the current state of the market and why the Montana Higher Education Student Assistance Corporation is currently facing losses, we ask for additional information related to:

1.   Information on MHESAC’s and SAF’s assets;
2.   Description of current risk management practices;
3.   Information related to capital asset requirements and capital management practices;
4.   Description of procedures in place for accessing capital;
5.   Description of those assets held in credit warehousing facilities;
6.   Information on potential risk of credit warehousing facilities and auction bond facilities;
7.   Description of those assets that have been securitized on the market;
8.   Information as to the percentage of student loan bonds that are securitized in auction rate bonds as opposed to fixed rated bonds, variable rate bonds and potential risk related to this ratio of auction bonds;
9.   Information concerning the decisions made in securitizing assets;
10.  Information on financing in place for the upcoming academic year;
11.  Relationship between MHESAC and SAF, including but not limited to, contracts between the two entities;
12.  Information relating to the administrative costs of MHESAC and SAF;
13.  List of those entities involved in rating MHESAC’s bonds and information as to any concerns with such entities; and
14.  Information on any changes in MHESAC’s bond ratings in the last 6 months.

Sincerely,

(s)

Max Baucus
Jon Tester

CC:

Steven Barrett, Board of Regents
Todd Buchanan, Board of Regents
Clayton Christian, Board of Regents
Kerra Melvin, Board of Regents
Janine Pease, Board of Regents
Lila Taylor, Board of Regents