FRANKFORT, KY -- Loans for about 27,000 of Kentucky's college students could be in jeopardy if the state's student financial agency can't come up with new money to lend, reports the Lexington Herald-Leader in its Saturday edition.
The Kentucky Higher Education Student Loan Corp., better known as The Student Loan People, announced Friday it was suspending loans to first-time borrowers because the national credit crisis has dried up a lot of money previously available for student loans, reports the Herald-Leader.
The agency has about 55,000 student borrowers a year. A news release said it would continue to make student loans to current or previous borrowers, based on the availability of funds.
The estimated 27,000 affected borrowers include current students and some who are planning to enroll this fall at the state's public universities, community and technical colleges, private colleges and universities and proprietary, or for-profit, institutions, the newspaper reports.
The Kentucky Higher Education Assistance Authority, a sister agency, announced it will pay the 1 percent default fee on student loans, effective May 1, to encourage lenders to make more loans available to Kentucky students.
Three schools will scarcely feel the suspension of loans: the University of Kentucky, Kentucky State University and Morehead State University. They participate in the federal Direct Loan Program in which the U.S. Department of Education sends money directly to the schools to be issued as student loans and thus does not involve private lenders, the newspaper reports.
"There will be next to no impact on us," said Lynda George, UK's director of financial aid.
On average, UK undergraduates borrow $4,500 a year to help pay for school; they graduate with about $17,900 of loan indebtedness.
Gary Cox, president of the Association of Independent Kentucky Colleges and Universities, said a state loan is crucial to many private college students because "it tends to be the gap filler" after a student learns how much aid is coming from the school and other sources, such as federal grants and state and private scholarships, the Herald Leader reports.
Brad Cowgill, interim president of the Council of Post Secondary Education says he is optimistic this issue will be resolved soon.
Jerry Davis, director of financial aid for the Kentucky Community and Technical College System, said: "I'm really not alarmed. There are still plenty of lenders out there."
Davis noted that institutions are not permitted to recommend a lender, but he said his office keeps a list of lenders that have expressed an interest in making loans to KCTCS students. The latest figures from KCTCS show that 17,549 students working toward two-year degrees have taken out loans. About 25 percent of them are first-time borrowers, he said.
Because of the bad market, the Student Loan People have been unable to sell bonds this year to gain money for student loans, said Jim Ackenson, the agency's executive vice president, reports the Herald-Leader.
With less money available for loans, there are fewer borrowers, and this has caused a drop in the agency's revenue, although this does not jeopardize its existence, he said.
Another contributing factor to the crisis is that many private lenders have dropped out of the student loan market. This happened because a federal guarantee for the loans has dropped from 98 to 96 percent of a loan's amount, and many previous lenders said the market is no longer profitable, reports the newspaper.
The U.S. Department of Education sets the interest rate for student loans. It is currently 6.8 percent annually. However, for undergraduates that rate will drop to 6 percent on July 1.
Ackenson and Jo Carole Ellis, the state agency's vice president for government relations and student services, said they are optimistic that one or more solutions are in the works.
For example, the U.S. House of Representatives has passed legislation that would authorize the Federal Financial Bank to sell money to state student financial agencies to issue as loans, the newspaper rep;orts.
In addition, the U.S. Department of Education is working on changing regulations that would allow it to become a "lender of last resort."
Meanwhile, Ackenson said the Kentucky agency is negotiating a deal with a major national bank to acquire new loan funds.
Both Ackenson and Ellis said they were optimistic the student loan crisis would be resolved before school opens on many campuses in August.
"I'm much more optimistic about the federal solution than we were before," Ackenson said.
In the past five years, The Student Loan People have provided $67 million for the state general fund budget and $22 million for KHEAA scholarships for Kentucky students, Ackenson said.
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