Facing its first net operating loss, the Montana Higher Education Student Assistance Corp. is reducing benefits to future student loan borrowers by $3 million and telling its business manager, the Student Assistance Foundation, to eliminate any unnecessary expenses.

The credit and liquidity crisis on Wall Street has increased MHESAC’s borrowing costs on its outstanding financings by more than $14 million the past nine months, said Jim Stipcich, president and chief executive officer of the Student Assistance Foundation, which serves as MHESAC’s business manager.

MHESAC Board Chairman Fred Flanders of Helena said the cost-reduction steps are necessary because of the recent disruption in U.S. financial markets and dramatic changes in lender yields approved by Congress in October.

“MHESAC remains committed to helping Montana students access postsecondary education,” Flanders said. “However, the reality is that the current climate within the industry is making it increasingly difficult for us to provide our usual high level of borrower benefit products. At this time, we are taking necessary measures to ensure continued educational funding for Montana students.”

However, unlike some student loan programs elsewhere, MHESAC still will have $175 million available for Montana students to borrow through its lending partners for the fiscal 2008-09 academic year, Stipcich said.

However, Stipcich said MHESAC’s board decided last week to reduce “borrower benefits.” What that means, he said, is that students no longer will be able to count on MHESAC to pay the borrower origination fee and default fee on their student loans on their behalf as it has in the past. It amounts to 2 percent.

Here’s how it works, Stipcich said.

Up until now, students obtaining MHESAC loans received 2 percent more in loan proceeds than they will in the future.

For example, in the past, if a student borrowed $15,000 in loans, that person would get the full $15,000 in loan proceeds because MHESAC picked up the 2 percent origination and default fees. That amounts to $300 in this example.

Starting this fall, a student borrowing $15,000 will get $14,700 in loan proceeds. The reason: the student, not MHESAC, will pay the 2 percent origination and default fees, and it comes off the loan proceed amount.

“They’ll have less money to pay for school,” Stipcich said.

In fiscal 2008, these borrower benefits totaled more than $4.2 million. That will be reduced to less than $1.2 million in the upcoming 2008-09 academic year. Most of the $1.2 million in borrower benefits remaining are in the form of interest and principal reductions for those who make their loan payments on time.

Asked about what expenses SAF intends to eliminate, Stipcich said, “We’d rather not talk about them now. At this stage, all issues are on the table.”

He said congressional changes to the yield on student loans since Oct. 1, 2007, have forced MHESAC and other third-party serving clients of SAF to quit acquiring student loans outside of Montana last fall.

“The loss of this business line has prompted SAF to thoroughly examine its operations,” Stipcich said.

Among SAF’s cost-cutting measures since then have been shrinking its staff by about 35 employees through attrition, Stipcich said. SAF now has 233 employees.

In addition to the SAF staff reductions, the MHESAC board’s resolution directs the Student Assistance Corp. to continue to examine areas where it can streamline the business activities it provides for MHESAC, Stipcich said.

Flanders said MHESAC’s board will continue to diligently monitor what’s happening in the student loan industry and work with its business partners to ensure student educational financial needs in Montana.

Some 20,000 Montana students borrow through MHESAC and its lending partners. MHESAC underwrites Federal Family Education Loan Program, or FFELP, for 85 percent of Montana college students.