STUDENT LOANS ARS SHOW NO SIGN OF RECOVERING

Approximately five months after the collapse of the $330 billion auction rate securities (“ARS”) market, bonds backed by student loans show no signs of recovering, which means no immediate relief is on the way for those holding these ARS.  Student loan-backed ARS account for approximately $85 billion of the $330 billion ARS market.  This is leaving many investors with little choice but to take discounts by selling these ARS on the secondary market.

Companies holding student loan ARS wrote down the value of the debt this year, some by as much as 35 percent.  Less than $3 billion of the securities have been refinanced, compared with more than half of the $166 billion sold by municipalities and 30 percent of the ARS issued by closed-end funds.

Steven Shafran, a senior adviser to U.S. Treasury Secretary Henry Paulson, said the federal government could help issuers of student loan ARS refinance their debt.  He indicated that U.S. Treasury and U.S. Department of Education officials are talking about how they might aid the issuers.  However, there is no plan in place for doing so at this time.