With the credit crisis still in full swing, what will happen when students go back to school this fall? Catch up on some of the latest industry developments with T.H.E.’s CFO Jamie Wolfe:
Has the student loan situation seen improvements? (Greentree Gazette, May 2008)
A detailed overview of the student loan credit crunch. Listen to the interview.
What the lending market may look like this fall. (Greentree Gazette, May 2008)
The Greentree Gazette
Jamie Wolfe
Chief Financial Officer
Northstar
May 2008
What student loans will NorthStar be issuing for September ‘08?
As of today we have suspended all our loan offerings. We are close to having a private loan from a new funding source. We have hopes that something will happen to make us able to offer Stafford and PLUS loans again. But the Kennedy-Miller legislation doesn’t get us there.
Is the phrase ‘greedy lender’ appropriate in the student loan industry?
As I understand the Miller-Kennedy legislation, if NorthStar loans $1 billion in FFEL as we did last year, and if the credit market doesn’t recover, we will be selling our loans to the U.S. Department of Education at an overall loss of about $14 million. If we choose not to, are we greedy, or are we prudent?
How much of the student loan money that’s borrowed today originates in the auction rate securities market?
Well, if you’re talking about 2007 or 2008, actually very little. The auction rate securities market is broken and for most of us, student loans have been priced out of the floating rate note market. Northstar currently has $2 billion worth of disbursed loans originally financed by short term warehouse lines of credit that we are waiting to finance in one of those two markets.
Can you please explain the auction rate process in understandable terms?
Pretend you’re a bank that wants to make $100,000 in loans, and you want to make it with depositor money. To obtain those deposits you plan to offer $100,000 in certificates of deposit. Three prospects arrive, each with $50,000 to buy those CDs. So you cleverly hold an auction. The three bidders offer to accept yields of 4 percent, 4.5 percent and 5 percent in turn. You need only $100,000 so you offer 4.5 percent. The two low bidders accept their CDs and are happy. The 5 percent bidder goes back to his office with $50,000. You invite them to return in 28 days to repeat the process at a possibly new interest rate. Actually, for more than two decades, this market has been an excellent way to finance long-term assets at less expensive short-term interest rates.
Who are the securities owners that are affected by the freeze-up in that market?
They include CFOs of mid-sized companies who have invested excess cash generated during a busy season to meet a payroll later during a slow season. They are 80-year-old retirees who thought they were buying a liguid short-term investment. An especially noteworthy example involves two brothers who sold a family-owned shipping company , then bought $750 million worth of notes they thought were very liquid.
What new experience might the president of a private college have this September?
Check the above photo. If it’s clear enough you can see the train tracks. There may be a student loan train wreck this summer. That may translate into a tuition payment train wreck this September.
If lender of last resort is operational by July, what loans will be originated, and who will own them?
Stafford and PLUS loans will be issued by guarantors who have origination and servicing capabilities like Great Lakes, USAF, PHEAA, etc. The funds they use to do so will come from the U.S. Treasury. Ownership is an interesting question.