MOHELA: Blunt plan won't hurt students

~ The agency outlined a plan to forgive between $4 million and $6 million of loans this school year.

JEFFERSON CITY, Mo. -- On the same day they considered paying the state millions of dollars to finance Gov. Matt Blunt's college building initiative, board members of Missouri's student loan authority also considered a much less publicized but important action.

Staff for the Missouri Higher Education Loan Authority outlined a plan to forgive between $4 million and $6 million of loans this school year for 8,000 to 12,000 college freshmen. And next school year, the MOHELA board was told, the agency plans to begin a new loan forgiveness program specifically for engineering students.

Those acts are the kind of thing that critics fear could be cut if the MOHELA board adopts Blunt's plan to provide the state $350 million for campus projects.

But staff for the Chesterfield-based, quasi-governmental agency say students and parents should not fret -- they will continue to get all their current benefits, regardless of whether a portion of the agency's profits get siphoned through the state.

In a series of interviews with The Associated Press, MOHELA staff outlined how they believe that to be possible. They acknowledge there must be a trade-off if Blunt's plan is approved. But they say the money targeted under Blunt's plan likely would not have gone for loan forgiveness programs anyway, but rather for the purchase of more student loans -- in essence, for the continued expansion of the agency's already considerable financial holdings.

"That money we're taking out of these transactions is unrestricted profits that MOHELA has built up that we have not historically been using for borrower benefits," said MOHELA treasurer Scott Giles. Absent Blunt's plan, "that money would go to purchase student loans."

The MOHELA board is to consider Blunt's plan Sept. 27.

Under the proposed agreement between MOHELA and Blunt's administration, the agency would transfer $30.3 million to the Missouri Development Finance Board almost immediately after the deal is approved by all parties. An additional $70 million would flow to the development board by late October or early November. And $30 million more would be transferred by December.

All of that money would come from MOHELA's current assets -- more specifically, from money accumulated from student loan payments that is in excess of what is needed to pay off the bonds underwriting those loans.

Most of those bonds are taxable, and that excess money normally would be plowed back into the purchase of more student loans, thus making even more money for MOHELA, Giles said. The agency has been growing rapidly in recent years. As of June 30, MOHELA held $5.2 billion in loans -- an increase of 20 percent over the past fiscal year.

It is a portion of the profits from loans underwritten by tax-exempt bonds that is typically used for loan forgiveness programs, Giles said, because federal regulations require that excess money to be either paid to the government or given back in borrower benefits. MOHELA currently has about $23 million of such money available for borrower benefits, Giles said.

But Attorney General Jay Nixon contends there is nothing that prevents MOHELA from using any or all of its profits -- including the money it would transfer to the state under Blunt's college building plan -- for the benefit of student loan borrowers.

By giving up some of its money, MOHELA would be giving up power to fulfill its mission of helping students afford college loans, Nixon said.

"The more power MOHELA has, the more power it has to buy down student loans, to pay off student loans for programs and to do its purpose, which is to make college more affordable to kids," Nixon said.

Some other Democrats are equally skeptical of MOHELA's explanation that the deal would not hinder its services to Missouri students.

"I don't buy that," said Sen. Joan Bray, D-St. Louis, who has opposed every incarnation of Blunt's plan since he first outlined it last January.

Another critic of the plan, Rep. Rachel Bringer, D-Palmyra, said she has yet to see any independent financial analysis of the potential effect of Blunt's plan on student loan benefits.

"I'm not sure they have enough information to make their statement" that student loan holders would not be harmed, Bringer said.

As a result of initial payments toward college construction projects, MOHELA's net assets would fall from around $237 million today to about $100 million by end of December, dropping its equity ratio below the 3 percent minimum established by its board to a level potentially below 2 percent.

But Giles said that's not a problem, because two financial consultants have assured him that a 1.5 percent equity ratio is considered adequate for not-for-profit, secondary loan holders such as MOHELA.

Beyond the initial payments, the proposed agreement calls for MOHELA to pay $80 million to the Missouri Development Finance Board within six months of striking the deal. Most of that money would come from the sale of an estimated $1.5 billion in loans for non-Missouri borrowers -- an amount equaling about one-quarter the agency's current loan portfolio.

At MOHELA's current growth rate, the loss from that loan sale could be made up within one to two years, Giles said.

Over the next six years, MOHELA would pay the state an additional $5.8 million every three months -- requiring the sale of as much as $2.4 billion of student loans over that time.

During that time, the student loan agency also would continue buying new loans -- underwritten partially by a state-pledged $1.1 billion to $1.8 billion in tax-exempt bonding authority over 11 years.

The potential also exists for MOHELA to enter new markets, because the agreement calls for the University of Missouri to consider increasing its use of MOHELA loans and for Blunt's administration to support legislation allowing MOHELA to initiate loans that it now must buy on the secondary market.

The result of his plan, Blunt says, is a "tremendous benefit for all parties" and an increased ability for MOHELA to serve Missouri students.

"MOHELA's prepared to fund this plan without any effect on student loan interest rates or the long-standing benefits MOHELA provides to its student borrowers," Blunt assures.

Nixon, however, remains unconvinced.

"The substance of this deal means college will be less affordable for Missourians if they move forward," Nixon said.