Auction-bond Flops Stick Student Loan Investors with Zero Percent Interest

[marmar]

from Bloomberg:



Auction-Bond Flops Stick Student-Loan Holders With 0% (Update1)

By Michael B. Marois and Jeremy R. Cooke

April 25 (Bloomberg) -- More than $9 billion of auction- rate bonds sold by student-loan agencies in U.S. states from Pennsylvania to Utah have trapped investors in debt that's not paying interest.

Rates on Pennsylvania Higher Education Assistance Agency bonds backed by student loans were set at 0 percent April 4 after auctions to determine interest costs attracted too few bidders. The same occurred on more than 10 percent of the $86 billion of student-loan debt, as failures triggered provisions in bond documents that limit the interest agencies must pay, according to data compiled by Bloomberg.

The collapse of the auction-rate market drove interest costs paid by states, hospitals and student-lending agencies as high as 20 percent, and froze investors in securities they couldn't sell. Now, holders of student-loan debt are stuck with bonds paying less than the 0.66 percent rate on the one-month Treasury bill.

``It's hard to explain, to conceptualize or even understand how someone can borrow money and not pay you interest,'' said Mike Saunders, who manages $1 billion in taxable student-loan bonds for Acton, Massachusetts-based Roundstone Advisors.

The bonds pay nothing because of a formula designed to ensure that borrowers don't pay more interest on their debt than they receive from their student-loan clients. The mechanism kicked in as rates climbed above 10 percent since February, when dealers stopped buying securities that went unsold at auctions. .......(more)

The complete piece is at: http://www.bloomberg.com/apps/news?pid=20601087&sid=aMBg8H6crmSI&refer=home

[dkf]

1. Good deal for students...sucks to be an investor.

[nichomachus]

2. Good deal until they stop making student loans