Arkansas is planning when and how to refinance $194 million in student loans in the private market when a federal loan program expires in 2014.
The amount is less than what other states hold and the Arkansas Student Loan Authority voted Friday to begin planning to issue bonds to refinance the loans before the market is flooded.
About 12,500 Arkansans have Stafford or Parent Plus loans through the Straight-A Conduit Loan Program implemented by the U.S. Department of Education, authority Executive Director Tony Williams said.
If the authority does not refinance its student loans in the program, those loans will be transferred to the Department of Educationwhen the program expires in January 2014. Williams said the government would sell the loans to a contractor.
“This does keep the loans under Arkansas servicing and control,” Williams said. And it benefits borrowers because “it does give them someone local to work with instead of a contractor in another state.”
He said loan rates are locked in and there would not be a financial impact on borrowers whether the state or a contractor holds the loan.
The program was created in January 2009 as a way to finance loans during the economic crisis, Williams said.
“Now the market seems to be stabilizing to the point where we can finance student loans through it again,” he said.
Loans were guaranteedby the federal government under the Federal Family Education Loan Program.
Now that the federal program is ending, the authority needs bonds to fund the loans, some of which have a 30-year repayment period, Williams said. He compared it with getting a mortgage when purchasing a house.
Williams said the authority had hoped Congress would vote to extend the program. He said extending the program would save the federal government about $1 billion.
“We’re just not seeing any momentum at all in D.C.,” Williams said. “It looks like the extension of Straight-A is a dead issue.”
RBC Capital Markets Managing Director Grant Carwile told authority board members that the 21 other loan agencies thatparticipate in the program are either making plans to refinance or have already begun.
RBC Capital Markets is likely going to underwrite the bonds, Williams said. An underwriter is a securities dealer who helps government agencies get bond issues to the market.
In total, loan organizations will be looking to refinance about $27 billion in loans, according to the presentation.
Arkansas “probably should go sooner rather than later,” Carwile said. “We think it probably makes sense for you to go ahead and get your deal done, get it out of the way, get out of the way of the North Carolinas and the Sallie Maes. Let them fight it out later with a whole bunch of bonds in the market.”
Carwile said the authority holds such a small amount of loans compared with other states that he is concerned Arkansas will get lost in the shuffle if it waits to refinance.
According to the presentation from RBC Capital Markets, 16 of 21 loan organizations are projected to have more loans to refinance than Arkansas.
For example, the North Carolina State Education Assistance Authority is projected to have $1.27 billion in loans that need to be refinanced in comparison with Arkansas’ $194 million.
Williams said the bonds have a minimum price of $100,000. He said one or two investors would buy all of Arkansas’ bonds.
Carwile said Sallie Mae has begun trying to refi-nance loans. It is projected to have 62 percent of all loans in the Straight-A program at $16.87 billion. It has already refinanced $2.8 billion in loans, according to the presentation.
He said the value of Arkansas’ loans to the market could decrease with so many other options.
“We worry about that being up against three or four deals that are [$600 million, $700 million] or $800 million and kind of getting lost in the shuffle,” Carwile said.
Carwile said the market for such bonds has been reasonably stable over the past few months and Arkansas should move now.
“You know where the market is today, but you don’t know where it’s going to be tomorrow,” he said.
Williams said Friday’s vote to move forward is only the first step for the authority.
He said once the authority decides on a plan it would have to be reviewed by the state Board of Finance and then voted on again by the authority before it could be put in place.
The state Board of Finance members are Gov. Mike Beebe, Treasurer Martha Shoffner, Auditor Charlie Daniels, Bank Commissioner Candace Franks and Department of Finance and Administration Director Richard Weiss.
The proposed timeline has a final vote on the bond transaction in August.
Northwest Arkansas, Pages 9 on 06/30/2012