Student loans get an infusion

A $1.1 billion investment from State Employees' Credit Union will give lender ample cash

Despite a sour credit market, the largest provider of student loans in North Carolina will have all the money it needs to meet demand for the 2008-09 school year.

The N.C. State Education Assistance Authority is making that promise based on a decision by the State Employees' Credit Union to invest $1.1 billion in the student-loan market.

The move comes about six weeks before colleges start classes, one of the busiest times of the year for financial aid offices.

The $1.1 billion will replace some of the money that had been generated through an often-used market known as auction-rate securities.

Lenders were caught off guard in February when the auction-rate securities market failed as part of the bigger credit crunch. Some lenders eventually got out of the business entirely.

But the failure was especially important to North Carolina students, because auction-rate securities were used to finance about $2 billion a year in student loans.

"We will use this investment from the credit union to refinance some of our taxable auction-rate bonds," said Steve Brooks, director of the state authority. "We also are using it to finance some new loans for this year."

The authority was not in danger of running out of money, but the $1.1 billion investment allows it to provide loans with better rates and conditions than other available options.

"The rate we got from the credit union was at least as good and probably better than we could have done anywhere else," Brooks said.

The credit union, in turn, is increasing its investment in a market with a good track record.

The authority backs about 60 percent of the student loans made in the state -- or about $3.3 billion worth.

The public is far more familiar with its partner institution, the College Foundation of North Carolina. CFNC works with borrowers, promotes saving plans and works closely with school counselors to increase college enrollments.

The work includes an emphasis on obtaining grants and scholarships before families borrow money, a philosophy that Brooks thinks is a good fit with the credit union. "They actually came to me when they read about the problems in the credit markets and how it was affecting us," Brooks said.

North Carolina's is the second-largest state employee credit union in the country, said Leigh Brady, a spokeswoman for the credit union.

It has 1.4 million members and $16 billion in assets. It also has worked with the state before to provide smaller amounts of financial aid to students.

"We are natural partners, since we all focus on providing low-cost financial services to benefit North Carolinians," said Shirley Bell, chairman of the group's board.

As part of the agreement, credit union members are eligible for supplemental student loans at reduced rates once they have exhausted the federally guaranteed loans available to them, Brady said.

"Members of our credit union have been begging us to come up with some kind of student loan product, and they do the best job of it," Brady said of CFNC.

Brooks said the state authority is working to refinance loans backed by tax-exempt auction-rate bonds.

"The credit union can't really help us in that regard," he said. "But this is the first big step toward getting them all done."