Credit crisis reverses student lender’s growth

Seven years after it embarked on an ambitious plan to rebuild itself, ISM Loans is back where it started.

During an unprecedented year of financial upheaval,
the not-for-profit stopped making and buying student loans, and laid off more than 100 employees. Its
president and chairman both resigned.

ISM, also known as the Indiana Secondary Market for Education Loans Inc., joins numerous private student lenders that have
stepped to the sidelines as the federal government has greatly expanded its lending to students and their parents.

New President Joseph Wood, now overseeing a
staff of nine, is waiting for the markets to change to get back into buying loans. Even though the organization
lost $11 million in the fiscal year that ended June 30, it still has a surplus of $68.8 million.

"You have to do what you have to do to
keep the organization alive," Wood said in an interview. "If you want to be helpful to parents,
you have to be viable."

The state of Indiana launched ISM in 1980 to buy student loans from banks so the banks could lend more. That mission was largely
supplanted in the 1990s when the federal government got more involved in student lending.

But in 2002, ISM’s board, led by Barnes & Thornburg attorney Rob MacGill, decided to dive
into the market in a bigger way. ISM began making more loans itself, often to lower-quality borrowers.

It rebuilt a loan-servicing operation, after
it had spun off its service arm in the 1990s. ISM wanted to provide superior service by matching borrowers
with one repayment specialist who could work with them throughout the life of the loan.

ISM built up its assets from $380 million in 2004 to $2 billion last year. Its work force topped
out at 130 people.

But
a storm hit in February 2008. To raise money to buy loans, ISM had sold bonds through the auction-rate securities markets.
Those markets melted, spiking rates on the bonds. ISM stopped buying or making loans and started cutting costs, mainly by
laying off staff.

"We
were throwing everything overboard that we could so that, in a worst case scenario, we could repay the bondholders,"
said Steve Clinton, ISM’s former president, who retired in September. "We spent 5-1/2 years building
it up and then we just had to tear it apart."

MacGill stepped down as chairman in October. Baker & Daniels attorney Charles Schalliol has
replaced him.

ISM is one
of scores of student lenders that have stopped making private loans. The nation’s largest student lender, Virginia-based
SLM Corp., saw its private loan originations fall 20 percent last year. SLM, or Sallie Mae, employs 1,500 people in Fishers.

Delinquency and default rates are up, for lenders
large and small.

Of the
$1 billion of ISM loans that are in the repayment stage, 79.4 percent were current at year-end, down from 84 percent
a year before. Over the same 12 months, defaults nearly doubled, to 1.7 percent of the loan pool.

That deterioration contributed to ISM’s decision
to dismantle its service operation, in which most of its employees worked. It outsourced the work to
American Education Services, based in Harrisburg, Pa.

"With AES already our largest loan servicing partner, the costs of transfer were minimal
and the transition smooth," Wood wrote in an e-mail.

ISM’s rise and fall prompted a bit of "I told you so" from John Hackett, the former
chairman of the organization. He voted against ISM’s expansion and then quit in protest when the board
overruled him.

"It
took a while, but I do feel vindicated," Hackett said by phone from his home in New Hampshire.

Hackett, a former venture capitalist and chief
financial officer at Cummins Inc., said ISM’s continued presence only added to an "over-availability"
of student loans.

"The
same thing happened in student lending that happened in residential real estate," he said.