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Some state governments have found a new source of cash. They're selling off their non-profit student-loan programs to for-profit loan clearing houses, such as Sallie Mae. Missouri is the latest state to propose such a plan, and as Frank Morris of member station KCUR reports, it's raising concerns that borrowers could have a more difficult time finding and repaying loans.
FRANK MORRIS reporting:
In Missouri, state funding for higher education has fallen off dramatically in the past four years. While there's little outward sign of trouble in this beautiful University of Missouri campus in Columbia, inside the school's medical research building, neglect is evident.
Mr. WILLIAM CRIST (Dean, School of Medicine, Missouri University): Notice no air conditioning, window air conditioners. Notice the rust on all the panels. This is the original 1950s lab.
MORRIS: William Crist, Dean of Medicine at MU, has managed to attract money to fix up most of the other labs in this building, but he says the school desperately needs a new facility to jumpstart its medical research program, and after years of facing financial dead ends, he supports selling student loans to raise money for the school.
Mr. CRIST: I think this is our best shot to get this building, and so I'm very strongly supportive of the governor's recently proposed plan.
MORRIS: In January, Governor Matt Blunt proposed selling the Missouri Higher Education Loan Authority, commonly known as MOHELA, with the goal of generating $425 million to fund scholarships and a campus building spree, but MOHELA was stunt. Pleading for the agency's survival, interim Executive Director Ray Bayer convinced the governor that the agency was worth millions more to the state if allowed to gradually sell some of its assets. He argues MOHELA is a huge benefit for students. The agency drops its loan rate a full three percentage points when borrowers begin payments. Bayer says just last year, MOHELA forgave $9 million in student debt.
Mr. RAY BAYER (Interim Executive Director, MOHELA): We offer the best benefits in the industry, and we do that because of our size. We have economy scales that other not-for-profits do not have.
MORRIS: MOHELA's architect, Allan Purdy, wants to keep it that way, but 91-year-old Purdy, appointed by Richard Nixon to the original governing board of Sallie Mae, says the proposed sale could cripple Missouri's self-sustaining loan agency.
Mr. ALLAN PURDY (Architect, MOHELA): I don't personally think it's ethical for the State of Missouri to force MOHELA to raise money on the backs of their poor students to give to the state.
MORRIS: But across the country, other state agencies have already cashed in. Sallie Mae and another giant secondary loan market company, Nelnet, have snapped up non-profit lenders in Massachusetts, Ohio, Texas, California, Arizona and a handful of other states.
Last year, though, Pennsylvania's higher education assistance agency rebuked what it considered to be a hostile takeover bid from Sallie Mae. The state agency's lobbyist, Scott Miller, accuses the lender of targeting states in financial distress.
Mr. SCOTT MILLER (Lobbyist, Pennsylvania): Sallie Mae is looking for vulnerable state agencies, looking for governors that are looking for a quick inflow of cash in exchange for what is a long-term asset to the state, saying, we got the money, and take the money upfront and don't worry about the future.
MORRIS: And Sallie Mae does have a lot of money. With $123 billion in student loans outstanding, it dwarfs the other lenders and returns huge profits to investors, but Scott Miller says Sallie Mae can be tough on borrowers, imposing much tougher payment terms. Sallie Mae spokesman Tom Joyce says his company has prospered, simply because it offers the best service to the most students and he says there's little reasons for states to maintain their own agencies.
Mr. TOM JOYCE (Spokesman, Sallie Mae): In some cases, states are sitting on hundreds of millions of dollars in unrealized assets that they could tap and either not or very slightly change the terms to students.
MORRIS: But selling even part of Missouri's student loan authority may not help students here. Now that a potential pot of money is on the table, lawmakers are coming up with alternative ways to spend it, and some have nothing to do with improving the state's colleges and universities.
For NPR News, I'm Frank Morris in Kansas City.
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