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July 30, 2007

$1.38 Billion Sale of State's Student Loan Portfolio Complete
ISAC deal will help agency pay off debt, focus on making college more affordable for Illinois students

DEERFIELD, IL –  The Illinois Student Assistance Commission (ISAC) today closed the sale of $1.38 billion in student loans to two not-for-profit agencies.  The transaction will help ISAC pay down its debt, exit the increasingly unprofitable business of holding loans made to non-Illinois students, and focus on making college more affordable for Illinois students.

The sale is the culmination of a standard public offering which began with bid solicitations going out to 42 firms nationwide.  Ten bidders responded, with the winning bids coming from Brazos Higher Education Service Corporation, based in Waco, Texas, and Panhandle-Plains Higher Education Authority (PPHEA), of Canyon, Texas.  The transaction was supervised by the consulting firms Morgan Stanley and Gardner, Underwood and Bacon. 

The portfolio sold by ISAC is comprised of 368,924 student loans made to 191,914 borrowers.  The average borrower indebtedness is $7,239.  Of these loans, more than 90 percent are “non-Illinois nexus” loans, meaning loans to non-Illinois students attending non-Illinois schools.  As with ISAC’s earlier portfolio sale in January, existing borrower benefits will be retained as a condition of the sale.

Most of the sale proceeds will go toward retiring a portion of ISAC’s existing debt.  Of the remaining net proceeds, $26.8 million is earmarked for the state’s need-based Monetary Award Program (MAP) grants for about 17,500 students attending Illinois universities and colleges during the Spring 2007 term, as appropriated in the State FY07 budget.  The balance of the net proceeds will be used to support State programs as authorized by the Illinois General Assembly.

“We are happy with the terms of the deal.  This transaction enables us to pay down debt while recasting ISAC as an Illinois agency serving Illinois students and taxpayers,” ISAC Chairman Don McNeil said.  “This is another giant step for ISAC in exiting the business of lending to students from Utah going to college in Boston.”

The profitability of the ISAC loan portfolio has declined dramatically in recent years, and last year the loss reached $7.5 million.  Most of this loss was attributable to non-Illinois borrowers, the result of loan consolidation, an unfavorable interest rate environment and increased competitive pressure which forced the agency to offer discounts to attract new borrowers.
“In light of dramatic changes in the student loan industry and the specter of shrinking federal subsidies, ISAC must cut the amount of risk we take on behalf of non-Illinois students attending non-Illinois schools,” McNeil said.  “The cost of doing business in the student loan industry has increased significantly.  There was no indication that this portfolio could be considered a stable source of profits.  We owed it to Illinois taxpayers and college students to make this move.”

What may be unprofitable for an agency such as ISAC, however, may well be profitable for organizations that can look to economies of scale ISAC does not possess, McNeil noted.

In addition to the $1.38 billion loan sale, ISAC is refinancing up to $400 million in federally-guaranteed loans and $350 million in alternative loans that have no federal guarantee.  These actions are part of a strategy to simplify the agency’s capital structure by reducing the administrative burden of the various systems it has developed to manage its complex capital structure and retiring some of its debt.

“Through these actions we will retire more than $2 billion in debt which has accumulated over the years.  And just as a borrower feels good when the loan is finally paid off, we are pleased to move this debt off the books,” said Andrew Davis, ISAC Executive Director.  “The scale of this debt retirement is unprecedented and will dramatically cut back on the agency’s administrative burdens.  We will be a more efficient agency that will better serve the long-term needs of Illinois families.”

Davis expressed confidence that the deal will help insure the continuation of ISAC’s scholarship and grant administration, as well as student outreach and counseling activities.

“After the January 2007 sale, we heard the concerns of those who argued that the loan sale would curb ISAC’s outreach activities,” Davis said.  “In fact, we have beefed up our public service outreach division and are promoting new, innovative programs to remind young people and their families - especially those in inner city and rural communities - that a college education is both crucial and accessible.”

Davis noted that the net proceeds of the sale will help cover the cost of MAP, the state’s flagship need-based grant program.

“Today’s sale transaction enables ISAC to send 17,500 students to college, move debt off the books, unload a revenue-losing portfolio and return our focus to Illinois students,” Davis said.

In January 2007, ISAC sold 75,370 loans totaling $648 million to Sallie Mae and Nelnet (National Education Loan Network).  The net proceeds from that transaction enabled ISAC to fund MAP Plus, first proposed by Governor Rod Blagojevich and then approved by the General Assembly in 2006, to assist middle-income students with college tuition and fees. 

Brazos Higher Education Service Corporation is part of the Brazos Group, the nation’s largest not-for-profit holder of student loans with total assets in excess of $13 billion.  It was founded in 1975 in Waco, Texas. 

Panhandle-Plains Higher Education Authority (PPHEA) was created in 1979 to serve the needs of students in the west Texas panhandle region by a former university Financial Aid Director who saw first-hand the frustration of those unable to afford college.

Created 50 years ago this month, ISAC is the state’s central provider of college aid.  Last year, ISAC issued 185,000 grants totaling $400 million and guaranteed $1.24 billion in loans to 232,631 students.  Its 529 prepaid tuition program – College Illinois! – has enabled Illinois families to prepay more than $1 billion in tuition and fees.  For information, visit collegezone.com.


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