The Rochester Democrat and Chronicle recently provided some good coverage of Governor Patterson’s proposed low-interest student loan program for NY residents. The product concept is very innovative. The state will issue private activity bonds and use the proceeds to purchase low/moderate rate fixed interest loans from participating lenders who originate them. The bonds will be backed by a $50 million default reserve that will be self-replenished through reasonable school and borrower fees.

It is a real win-win for all parties in NY. Students will have access to lower interest, fixed rate loans that won’t be subject to inappropriately tightened credit standards. Schools can be assured that their students will have access to funding in a very challenging credit environment and will put skin in the game to make sure their borrowers perform. Lenders have a real and robust secondary market to which they can sell their loans. The state will have a self-replenishing pool of funds to make new loans and earn modest revenues for a strained budget.

This couldn’t come at a better time. With the destruction of the capital markets, industry experts estimate that as much as 40-50% of alternative (credit-based) student loan financing will be choked off this coming 09/10 academic year. This is largely due to the exodus of lenders who are unable to obtain financing to make new loans as there is no functioning secondary market at this time to purchase them. Innovative public/private partnerships such as these are exactly what’s needed to bring confidence back to to the alternative student lending market and grease the return of a thriving capital market.