The state’s student loan authority suspended its Michigan Alternative Student Loan program yesterday, citing a lack of available capital to fund the program.

In an announcement on its website, the Michigan Higher Education Student Loan Authority said the move was due to “the current and unprecedented capital markets disruption.”

The program, known as MI-LOAN, lends to students at public and private colleges and universities in Michigan.

Investors have balked at buying bonds backed by student loans in recent weeks as they’ve become worried about the potential failure of borrowers to repay the loans.

The fears come after banks and investors have lost billions of dollars as borrowers have defaulted on home loans. Many of those loans – especially ones in the now-infamous sub-prime category – were taken out by people who couldn’t afford them, leading to widespread defaults.

Since banks funded many of the loans by packaging them together and selling them to investors, the effects of those defaults were spread across the economy.

Now, as the U.S. economy slows, investors are worried that other securities backed by loans might not be as solid as they once thought.

The Michigan student loan authority said the suspension of the loan program won’t affect loans that had been applied for before today.

Tuition bills for winter semester were due at the beginning of January, so most students currently using the MI-LOAN program to pay their bills at the University probably won’t be affected. If the suspension continues, though, it could mean that students who were planning to apply for the loans to pay spring and summer tuition might need to find money elsewhere.

The Michigan Higher Education Student Loan Authority said in the statement that the program will be reinstated when “conditions warrant and funds become available.”

The MI-LOAN program is one of three listed on the University Office of Financial Aid’s “Alternative Loans” website. Loans issued through the program – which aren’t based on financial need – carry a lower interest rate than PLUS loans funded by the U.S. Department of Education. But they’re more expensive than some other federal student loan programs, like the Perkins loan program.

Representatives from the Michigan Higher Education Student Loan Authority and the University of Michigan were unavailable for comment last night.

The Wall Street Journal reported on its website last night that about $10 billion worth of securities backed by debt from institutions like the student loan authorities of Montana and Mississippi, Carnegie Hall and Deerfield Academy, an exclusive Massachusetts prep school, failed to find buyers at an auction yesterday.

The newspaper said bonds issued by Michigan Higher Education Student Loan Authority were not among those that failed to find buyers at the auction, but that the agency has issued similar bonds in the past.

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