U.S. Sens. Max Baucus and Jon Tester, D-Mont., Friday called on leaders of two financially struggling Montana student loan entities to answer a number of questions about their investments and operations.

“Our primary concern has been, and continues to be, the affordability and accessibility of higher education for Montana students,” Baucus and Tester wrote.

Their inquiry comes on the heels of announcements this week that the Student Assistance Foundation was laying off 23 employees and Montana Higher Education Student Assistance Corp. was suspending its student loan consolidation program after ending some borrower benefit programs earlier this month.

Also this week, Rep. Dan Villa, D-Anaconda, said he would sponsor legislation in 2009 to make the SAF and MHESAC comply with state open meeting laws and undergo regular legislative audits.

Baucus and Tester sent the disclosure request to MHESAC Chairman Fred Flanders of Helena; SAF Chairman Jim Bell of Missoula; Board of Regents Chairwoman Lynn Hamilton of Havre; and Commissioner of Higher Education Sheila Stearns.

The senators discussed failed auctions of bonds backed by student loans by lenders such as MHESAC, saying: “there may have been increased risk in excessive reliance on these bonds.” MHESAC has more than $1.2 billion of its $2 billion portfolio invested in these auction bond notes.

“Concerns have also been raised regarding the entities’ lack of transparency and openness concerning its high-risk investing practices, lack of diversification of investment and exposure to losses,” Baucus and Tester wrote, referring to MHESAC and SAF.

They asked the SAF, MHEAC and higher education leaders to respond to 14 issue topics so they can assess the current state of the student loan market and why the MHESAC faces losses. (See sidebar.)

“We will continue to keep a careful eye on the situation and assess alternative options to ensure Montana students have uninterrupted access to financial aid this coming year and for years to come,” the senators said.

In response, Jim Stipcich, SAF president and chief executive officer, said he welcomes the inquiry and looks forward to working with the senators to find a workable solution to the current federal student loan situation. Much of the information they are seeking already is publicly available on MHESAC’s Web site and in publicly available disclosure statements of bond issues, he said.

“We will certainly demonstrate the highest level of cooperation possible to this request,” Stipcich said. “We at SAF and MHESAC remain committed to providing Montana students with access to higher education.”

Both SAF and MHEAC have asked in recent weeks for federal involvement to address the availability of student loans, the senators said. To respond, Baucus and Tester said they want to learn more about what “steps SAF and MHESAC have taken placing them in the position where they need to reach out for assistance.”

So far, Montana colleges and universities have not faced problems with students getting access to financial aid, the senators said. The senators said they are comforted that MHESAC has said it has $175 million in place for loans for Montana students for the 2008-09 school year.

However, there is no certainty about the availability of funds in future years. In an April 16 interview, Stipcich said, “At this point, we don’t know if we could access the markets to raise funds for future years.”

Baucus and Tester noted that the national student loan industry has not been exempt from the turmoil in the U.S. credit markets, with many lenders struggling to secure the money to finance student loans.

“Congress passed student loan legislation to make higher education more affordable through increases in Pell grants and lower interest rates for student loans,” the senators said. “Lenders from across the country have testified to Congress that the primary reason lenders are pulling out of the student loan business is because of the overall credit crunch.”

The losses MHESAC faces are a result of the current market volatility and “potential risk in types of securities,” they said.

The two Montana senators said they, along with 18 colleagues, sent a letter earlier this month to Education Secretary Margaret Spellings and Treasury Secretary Henry Paulson asking that they take necessary steps to ensure access to federal student loans.

“We also support current steps being taken to expand authority of the Department of Education as the lender-of-last-resort, providing the backstop to the private market,” Baucus and Tester said.

To ensure that Montana students obtain adequate financial aid in future years, the senators encouraged Montana universities to consider alternative lenders, including helping students get access to the Direct Loan program.

Higher Education Commissioner Stearns declined comment until she has received the letter, while Regents Chairwoman Hamilton said she is “glad to see our Montana delegation recognize the importance of safeguarding student loan access.”

Senators' inquiry topics

U.S. Sens. Max Baucus and Jon Tester, D-Mont., asked the chairmen of two student loan-related groups, the Board of Regents chair and the commissioner of higher education to provide them some information, including:

- Information on the assets of the Montana Higher Education Student Assistance Corp. and Student Assistance Foundation.

- Description of current risk management practices.

- Information related to capital asset requirements and capital management practices.

- Description of procedures in place for accessing capital.

- Description of those assets held in credit warehousing facilities.

- Information on potential risk of credit warehousing facilities and auction bond facilities.

- Description of those assets that have been securitized on the market.

- Information as to the percentage of student loan bonds that are securitized in auction rate bonds as opposed to fixed rated bonds, variable rate bonds and potential risk related to this ratio of auction bonds.

- Information concerning the decisions made in securitizing assets.

- Information on financing in place for the upcoming academic year.

- Relationship between MHESAC and SAF, including but not limited to, contracts between the two entities.

- Information relating to the administrative costs of MHESAC and SAF.

- List of those entities involved in rating MHESAC’s bonds and information as to any concerns with such entities.

- Information on any changes in MHESAC’s bond ratings in the last six months.