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Student loan company files for bankruptcy

Posted: April 19, 2008 1:18 a.m.
Updated: June 20, 2008 5:02 a.m.
The Education Resources Institute, the oldest and largest nonprofit guarantor of private education loans in the country has filed for bankruptcy protection in Boston while it reorganizes, listing debt of as much as $1 billion and assets of more than $1 billion in its Chapter 11 petition.

This action was necessary as the nation's ongoing credit woes continue to cause unprecedented volatility in the student loan market and immense hardships on loan-related companies. Difficulties in financing the securitization of private education loans, along with a rise in borrower defaults and delinquencies brought on by a slow economy, have adversely impacted TERI's liquidity.

"Because of the recent turmoil in the financial markets, demand for bonds backed by student loans has evaporated," the company's chief executive, Willis J. Hulings III, said in court papers.

The lack of investor demand had made it harder for student lenders to raise money to finance their operations. CIT Group Inc. and NorthStar Education Finance Inc. last week said they will stop making new loans to U.S. students because lending costs have soared. Only two student loan companies sold debt in the asset-backed securities market last month, and no new private-loan bonds of the type that TERI specializes in have been bought this year.

Based in Boston, TERI is the largest nonprofit, private guarantor of student loans in the country, providing financial guarantees for First Marblehead Corp. The company helps students fill the funding gap when government-backed loans are not enough to cover the costs of college.

First Marblehead Chief Executive and President Jack Kopnisky said in an April 8 news release that since 2001, TERI "has been the exclusive third-party provider of borrower default guarantees for our clients' private student loans."

The nonprofit institute guarantees about 20 percent of private student loans, including $4 billion in new loans last year, Hulings said.

Colleges and universities have begun to see a tightening in access to private student loans, according to two recent reports, as a number of lenders have curtailed or stopped making some types of loans in both the private and federally backed loan markets. At the urging of Congress, The U.S. Education Department has taken a number of steps recently in case emergency measures become necessary to assure the availability of student loans.

"TERI believes that the filing of the Chapter 11 case will enable it to avoid a near-term liquidity crunch that, without the protections afford by Chapter 11, would threaten its viability," Hulings said, adding that the company hopes to develop a long-term business plan to continue its loan guarantee programs.


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