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Investors Receive 0% Return Rate

Investors of some student-loan auction-rate securities are seeing unprecendented returns (and not in a good way).  Bloomberg is reporting that more than $9 billion of auction-rate bonds sold by student-loan agencies have trapped investors in debt that is not paying any interest.

Over the past few months, many auctions in these bonds have failed.  These failures have triggered certain provisions in the bond offering documents that limit the interest that agencies must pay.  The result, loans with no returns.

According to Bloomberg, the bonds are paying zero interest 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.  These provisions became effective after the auctions began to freeze and rates initially climbed to over 10%.

The collapse of the auction-rate market in February left many bond issuers, student-loan issuers included, unable to raise additional capital.  According to Thomson Reuters, no new municipal bonds backed by student loans were sold in the first quarter of this year, the first time this has occurred in almost 40 years.

One need only look at the daily headlines to see new victims of Wall Street’s creative subprime financing.  The fallout from the subprime crisis continues.    

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