Conn. agency expects higher demand for student loans

NEW YORK (Reuters) - A Connecticut state-backed student loan agency anticipates a pick-up in student loan applications as private companies exit the market after losing access to funding, its executive director said on Friday.

The Connecticut Higher Education Supplemental Loan Authority is asking the state legislature to increase its borrowing capacity to $300 million from about $170 million, Executive Director Gloria Ragosta told Reuters.

"We have students that borrow from us every year and we anticipate that we may get more volume this year as other lenders tend to get out of the market," she said.

A number of private companies, such as CIT Group Inc., have announced they are exiting the student lending business because they have lost access to cheap funding with the collapse of the $330 billion U.S. auction-rate market.

Public student loan authorities and not-for profit lenders were also hit. No tax-exempt student loan securities were sold in the first quarter of 2008 for the first time in nearly 40 years, according to Thomson Financial.

A number of state agencies, for example in Pennsylvania, Michigan, Iowa and Minnesota, were forced to temporarily suspend loan programs.

In response to these problems, bills were introduced in the U.S. Congress to offer more money and liquidity for student loans.

On Thursday, Massachusetts Sen. Edward Kennedy introduced the "Strengthening Student Aid Act for 2008," to help students receive federal grant and loan aid to pay for college in a shaky credit market. A House bill has also proposed raising loan limits.

Ragosta said her agency escaped problems faced by other states because it does not use auction-rate securities. Many borrowers favored this debt because it allowed them to raise long-term funding at cheaper, short-term rates.