Disaster Averted FRANKFORT, KY (WEKU) - Quick action by state officials appears to have prevented a disastrous collapse of student loan programs in Kentucky.

Last Thursday, The Student Loan People, as they're known in Kentucky, announced they had run out of money for students to borrow. It was dire news from an agency expecting to provide around 500-million dollars in low-cost loans to about 110-thousand students this academic year. Edward Cunningham, who heads the agency, blamed the national mortgage crisis.

"The collapse of the credit markets, which froze our ability to fund student loans is a nationwide problem. It is a problem to which we did not contribute, but we certainly are a victim," Cunningham said.

And it's a problem so severe, and so widespread, that Congress this spring quickly moved to approve the Ensuring Continued Access to Student Loans Act of 2008. It requires the U-S Department of Education to purchase student loans made by the states, but provides no initial funding.

"So, student loan agencies were forced to come up with some interim financing to be able to purchase loans until they could be sold to the Education Department."

That's Kentucky Finance Secretary Jonathan Miller, who spent time in Washington helping craft solutions to the crisis. Last Friday, Governor Steve Beshear announced Kentucky's plan for bridging the funding gap.

"With permission from the federal government and a seal of approval from credit agencies, state government plans to buy a 50-million dollar bond that will act as a sort of bridge loan until federal money arrives," said Beshear.

Beshear believes Kentucky may be the only state in the nation using private bond proceeds for this purpose.

"Some of them have borrowed off their public pension systems, while others have closed down their student loan operations altogether," he said.

Kentucky's bond will come due next November, with a variable interest rate, currently at three-point-two percent. That means the state will pay almost two million dollars in interest on top of the 50-million dollar principal. Still, it's a good deal, says Edward Cunningham.

"After we fill this bucket with student loans, we can participate those loans to the United States Department of Education. They will give us the money for them and we can then reuse that money, so we will leverage this bucket probably three or four times this year," he said.

Even though not required by Kentucky law, the state wanted a couple of oversight committees to scrutinize the bond deal before finalizing it. The Properties and Buildings Commission was first to sign off on the plan, which then moved to the legislature's Bond Oversight committee. Maysville Rep. Mike Denham, who chairs the committee, wanted to know why local banks aren't picking up the slack.

"I know in our community years ago, all the banks used to fund those loans themselves in the local area," he said.

But James Ackinson of the Kentucky Higher Education Student Loan Corporation says the low interest loans don't much interest local banks anymore.

"Even the big commercial banks, as we look at who the potential lenders in market place might be, are having a lessened appetite for this paper," said Ackinson.

As the committee prepared to give unanimous support to the bonding plan, Louisville Rep. Jim Wayne praised everyone involved in its development.

"In this case, you have some really vulnerable families and students that are really out on a limb in regard to their children's education. I just think this professionalism you bring to this task is really being applied in the highest form in this particular program that you've designed," said Wayne.

The state is now expected to quickly close on the bond deal, and in coming days, The Student Loan People already have plans to loan around 35-million dollars to about 16-thousand students. © Copyright 2009, WEKU