CHESTERFIELD, Mo. -- Missouri's student loan authority will delay part of a scheduled payment toward the state's college construction program because of financial losses and uncertainty over the U.S. credit market.
Missouri Higher Education Loan Authority board members decided Friday that the financial institution should hold on to as much cash as possible for the next few months as credit worries cause banks and Wall Street investment firms to tighten the amount of loans they make.
"Huge banks are holding on to cash," board member Greg Upchurch said during the meeting. "It sounds to me like people who know the business and are very prudent with their affairs are hanging on to cash."
Under state law, MOHELA is to make a $5 million quarterly payment to the state by Monday as part of a several year, $350 million college building plan. MOHELA has already invested $230 million in a fund for the program.
MOHELA's board decided to pay just $2.7 million of the payment due Monday. It will get that money from interest that has accrued to the $230 million it invested in the fund in September. The remaining $2.3 million will be paid later in the year, unless MOHELA decides to defer the payment yet again.
The loan authority has lost $12.9 million this year, executive director Raymond Bayer Jr. said Wednesday, as it's been affected by a national credit market crunch and a reduction in federal subsidies to lenders.
Bayer insisted the loan authority remains financially strong, but added it is nonetheless "feeling the pressures of the credit crisis."
Board member Tom Reeves said Friday that he's worried MOHELA might be the subject of "margin calls" in the future. Such calls happen when outside banks require MOHELA to put down cash for some of its debt. Margin calls happen when banks get jittery that an institution like MOHELA doesn't have enough assets to back up the debt it takes on.
A recent margin call from Bank of America required MOHELA to put down $9.7 million, which the loan authority was able to do. But Reeves said the authority should keep as much cash on hand as possible.
"At any one point in time, someone could demand anything of us," Reeves said.
A 2007 law backed by Gov. Matt Blunt and Republican legislative leaders required MOHELA's $230 million to the state last September, plus $5 million in quarterly payments for the next six years. Most of that money is to finance new or improved buildings at public colleges and universities.
In exchange, the authority received a commitment of continued annual tax-exempt bonding allocation from the state, which helps hold down the financing costs for its student loans.
Hoping for market rebound
State law allows MOHELA's quarterly payments to be reduced by the amount of interest the state has earned from the money it already has received from the loan agency. Because of that credited interest, MOHELA met its first quarterly installment in December by paying about $3.1 million to the state.
MOHELA board chairman John Smith said after the meeting he expected the U.S. credit markets to rebound within a few months, which would allow MOHELA to pay the $2.7 million it will owe along with future quarterly payments.
"It has to get better," Smith said of the credit market. "If it gets worse, we're in a deep problem in this country."