Mo. student loan agency ending interest rate breaks

JEFFERSON CITY, Mo. -- Missouri's student loan authority plans to stop offering discounted interest rates next month because of financial pressures that are forcing it to seek federal help to continue serving new borrowers.

The Missouri Higher Education Loan Authority will quit offering its current interest rate breaks for new borrowers who pay with automatic withdrawals and for students entering public service professions, such as teaching, law enforcement and nursing.

The changes will take effect for loans issued after June 1.

"We're still committed to loan forgiveness programs and borrower benefits. Unfortunately we're not going to be able to do it in the form of reduced interest rates promised for many years to come," executive director Raymond Bayer Jr. said Tuesday.

The decision was made at a board meeting Friday, he said.

The cutback in borrower incentives comes as the Chesterfield-based student loan agency -- for the first time in its 27-year history -- is turning to the federal government for help financing its loans.

Bayer said the agency plans to tap a U.S. Department of Education line of credit for several hundred million dollars to finance loans made during the next school year.

The student loan industry has experienced financial pains in recent months, due partly to a 2007 law that cut its federal subsidies and partly to the credit-market crunch that has made it more difficult for lenders to package and sell loans for a profit.

Missouri's loan authority has added pressure on its resources. Under a 2007 law backed by Gov. Matt Blunt, MOHELA is to transfer $350 million to the state over six years to finance college building projects.

The loan agency sold some of its assets and tapped into excess cash to transfer the initial $230 million to the state in September. But because of financial losses, it delayed a scheduled quarterly payment to the state in March.

Noting the general financial troubles in the student loan industry, Bayer said there is no connection between the college building payments and MOHELA's decision to curtail its interest rate breaks.

"This already has happened industrywide; borrower benefits virtually don't exist," Bayer said. "We had held out as long as we could."

But leading Democrats suggested MOHELA's cutbacks resulted from the Republican governor's building initiative.

Democratic gubernatorial candidate Jay Nixon, the current attorney general, described the MOHELA decision as a "crushing blow" to students already paying higher tuition.

"When Gov. Blunt raided MOHELA's assets, the one thing he assured us was that it would cause no harm to Missouri students," Nixon said in a written statement. "It was obvious -- at least to those of us who fought the MOHELA raid from the beginning -- that Missouri students would end up paying the price. And now they are."

House Minority Leader Paul LeVota, of Independence, and Democratic treasurer candidate Rep. Clint Zweifel, of Florissant, also claimed Blunt's college construction plan had weakened MOHELA and contributed to its decision to end its student interest rate breaks.

Zweifel pointed to a February 2007 memo by Liscarnan Solutions LLC warning that potential changes in federal student loan policies could invalidate its previous conclusion that the building payments would not jeopardize MOHELA's financial health or its benefits to students.

"The contention that when you suck $350 million of assets out of an organization that it has no effect on their ability to work through a pretty tough and difficult time in the credit market is just silly," Zweifel said.

Blunt spokeswoman Jessica Robinson said the Democratic criticism was simply wrong.

"Jay Nixon has always been opposed to every project funded by the Lewis and Clark Discovery Initiative, and Jay Nixon has never understood how MOHELA operates," she said. "Now he seems to be entirely unaware of a global problem that affects every entity that used auction-rate securities."

Missouri's loan agency has shaved between 2 and 3 percentage points off the interest rates charged to people who pay by automatic withdrawal, depending on whether they attended school in state and whether their loans are guaranteed by the state.

That will drop to a one-quarter of a percentage point reduction beginning June 1, Bayer said.

The loan agency also will cease a program that offered interest rates of 3.25 percent -- or 0.25 percent if payments were made through automatic withdrawal -- for students who remained to work in Missouri as teachers, nurses, police, firefighters, paramedics, social service workers, state employees or members of the National Guard or reserves.

Bayer said those two interest-rate-reduction programs have benefited fewer than 5 percent of MOHELA's loan recipients, or about 23,000 of its roughly 500,000 borrowers. Those loans account for about $170 million of its $5.1 billion in loans, he said.

The agency will continue to offer loan forgiveness programs, including one it announced in December 2006 for college freshmen enrolling in pre-engineering programs.

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MOHELA: http://www.mohela.com