Credit unions to help Ill. agencies with college aid

CHICAGO -- Eight Illinois credit unions have partnered with two state agencies to provide $100 million in financial aid for college students through a new program designed to plug funding gaps brought by the nation's credit crunch, state officials announced Sunday.

The funding was expected to ease financial burdens for about 20,000 students.

"This financing package will enable thousands of students to attend college this year, knowing that they can pay their tuition," Gov. Rod Blagojevich said in a statement.

It has become difficult for college students -- especially those from lower income levels -- to secure loans because lenders have pulled out of the market, Blagojevich's office said. In Illinois, state-administered college tuition aid has dwindled since 2007, when the subprime mortgage sector of the credit market began its decline, the governor's office said.

The funding announced Sunday will come through the Stafford Loan Program. Stafford loans have a 6.8 percent interest rate and are available to students without a check of their credit history. Stafford loans typically range from $3,500 to $20,500.

To be eligible for the loans, students must show need for the money and be U.S. citizens or have permanent resident status.

The credit unions will finance the loans through a three-part, $100 million bond issuance, said Patrick Smith, the Illinois Credit Union League's director of strategic services. Terms of the deal require the Illinois Department of Education to be a guaranteed buyer at maturity, which Smith said mitigates the credit unions risk.

Smith noted the credit unions funding the program are among the state's largest, with more than $500 million in assets each. The credit unions expect to turn a profit on the deal, Smith said, though that's not the only reason they became involved.

"It made sense from a business standpoint, but it also made sense from a mission standpoint," Smith said. "Credit unions have always been the 'benevolent lenders,' if you will. With the pullback in investment in student loans from some of the larger investors, we saw this as an opportunity to fulfill our goal of people helping people."

The program will be run by the Illinois Student Assistance Commission, which administers much of the key state and federal grant, scholarship, loan and prepaid tuition programs available to Illinois' post-secondary students.

"When the global credit markets turned their backs on Illinois students, these eight credit unions stood tall," ISAC Executive Director Andrew Davis said. "This deal is terrific news for Illinois students and their families."

Davis brought the idea to the Illinois Credit Union League after learning that the North Carolina State Employee Credit Union agreed to back a student loan bond to refinance that state's education assistance agency. The deal was approved by both the Illinois Department of Financial and Professional Regulation and the Illinois Credit Union League.

Lenders pulling out of the market has rocked the student loan industry, limiting competitive incentives that made borrowing cheaper, said Howard Marella, the Brewer Futures Group's chief credit markets strategist in Chicago.

"It's dried up a lot of the bid and offer," Marella said. "And that's really hurt the debt market's liquidity."

It could become even more difficult and expensive for students to borrow as the debt market continues to slide, Marella said.

That trickle-down impact of the credit crunch has caused state student loan agencies in Massachusetts, Minnesota and Pennsylvania to announce this year that they have little or no money to lend their state's college students, Blagojevich said.

The credit unions involved in the partnership include: Alliant Credit Union of Chicago, Baxter Credit Union of Vernon Hills, Citizens Equity First Credit Union of Peoria, Corporate America Family Credit Union of Elgin, Credit Union 1 of Rantoul, I.H. Mississippi Valley Credit Union of Moline, Motorola Credit Union of Schaumburg and Scott Credit Union of Collinsville.

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On the Net:

Illinois Student Assistance Commission: http://www.collegezone.com