Bank of North Dakota keeps student loan funds flowing

Northwestern Financial Review, Sep 15-Sep 30, 2008 by Wheeler, Liz

While disruptions in the capital markets have hampered most student loan operations recently, the state-owned Bank of North Dakota continues to operate a robust student loan business.

In 1967, BND made the first federally-insured student loan in the nation. "By state statute, we not only originate loans but we also administer the guarantee agency," said Julie Kubisiak, a 29-year BND veteran and senior vice president. Kubisiak began her banking career at BND in student loans and now oversees the program and its guarantee program.

While BND has always focused on students with North Dakota ties-residents attending accredited schools out of state or students attending North Dakota schools-the bank has branched out regionally in Montana, Wyoming, Minnesota, Wisconsin and South Dakota. "We felt the people in these five states had a similar manner in which they repaid their debts," Kubisiak said.

BND administers a family education loan and a supplemental, state-guaranteed Dakota Education Alternative Loan. "We encourage students to exhaust borrowing from all federal programs first, then we'll look at a DEAL loan, a credit-based application," Kubisiak said. If the borrower doesn't have a credit history, BND requires a co-signer. However, the co-signer isn't held responsible if the borrower dies or defaults because the loan is 100 percent guaranteed by the state. Unlike some federal programs, though, the loan isn't subsidized and interest accrues while the student is in school although payments are deferred.

Out-of-state borrowers are charged a 2 percent administration fee and a 1 percent higher interest rate than those with North Dakota ties.

BND also purchases loans from other lenders in addition to originating and servicing student loans.

When the auction rate securities market soured, it dried up a lot of funding for other student loan lenders. Since then, BND has been getting a lot more interest in its loan programs. "BND has our deposit base to use for borrowing access-getting liquidity to do student loans," Kubisiak said, so a souring market somewhere else had no impact on their ability to continue growing their student lending area.

Another factor in BND's increased popularity is the outlawing of a preferred lender list by the Department of Education. "Schools were instructed they have to be more open about which lenders they suggested their students use," Kubisiak said.

"Some states asked us if we're purchasing loans. Some schools are asking for assistance for students," Kubisiak said. "We typically do $90 million a year. I can't tell if it will match that, but I believe it will exceed that amount."

While BND has not purchased an out-of-state portfolio at this time, Kubisiak said, "If there's an affiliation with BND, we would take a strong look [but] we were never intended to be a national lender."

The Bank of North Dakota was created by the state legislature in 1919 with $2 million in capital (about $24 million in today's economy) and now operates with more than $160 million in capital and $3.1 billion in assets. Being state owned means an instant constituency. "It has the state deposits, and state tax payments are also part of that captured deposit," Kubisiak said. "We are mandated by the North Dakota legislature to return to the general fund $60 million" every two years. However, the bank "made sure we have a capital base, and they cannot bring the bank's capital base down below $100 million."

The Industrial Commission, made up of elected officials, acts like a board of directors for the bank. It meets monthly with bank President Eric Hardmeyer. "In addition, we have a seven-person advisory board appointed by the governor which is made up of bankers and industry representatives who meet monthly with bank management," Kubisiak said.

The bank operates like a bankers' bank. "We do have retail operations; however, we're not to compete with other lenders in the state so our interest rates are nothing to write home about," Kubisiak said. "Primarily our focus in loan programs is participation loans where we assist other lenders in the state to make their loans or state programs like farm loans or PACE (Partnership in Assisting Community Expansion ) or student loans. Most of the loans the bank has in its portfolio are guaranteed loans including student loans."