Maine Educational Loan Authority(MELA)

2009Annual Report

131 Presumpscot Street � Portland, ME 04103 � phone (207)791-3600 / (207)255-4063 � fax (207)791-3616

April 28, 2010

Governor John E. BaldacciState of MaineOffice of the Governor1 State House StationAugusta, ME 04333-0001

Dear Governor Baldacci:

Pursuant to 20-A M.R.S.A., Chapter 417-A, Section 11427, enclosed is a copy of the Maine EducationalLoan Authority’s (MELA) annual report for the fiscal year January 1, 2009 through December 31, 2009.MELA’s annual report includes the following sections: introduction and background information; programadministration (loan origination and servicing); application volume and distribution; loan volume; borrowerdistribution; summary; charts and graphs to illustrate the narrative contained within the report; and basicfinancial statements with management discussion and analysis.

MELA was established in 1988 to assist Maine students and their families in achieving their higher educationgoals by providing a supplemental or alternative student loan program. MELA’s supplemental student loanprograms currently consist of The Maine Loan® and The Maine Medical Loansm. The Maine Loan, MELA’sprimary student loan product, exists to bridge the gap between the full cost of undergraduate and graduatehigher education and other traditional financial aid resources such as scholarships, grants, and the Federaleducation loan programs. The Maine Medical Loan was created in 1998 to assist Maine students pursuing aDoctor of Medicine (MD) or Doctor of Osteopathic Medicine (DO) degree. MELA expanded the scope ofits medical loan in 2002 to include other degrees such as dentistry, chiropractic, and veterinary medicine. Thisloan program is available to eligible medical students to borrow funds up to the full cost of a medical degreeless other financial aid.

Maine’s public and private institutions of higher education continue to be the greatest beneficiaries of MELAloans. MELA’s loan volume in 2009 was approximately $22,414,714 in originations, which is a decrease ofnearly 31% when compared with the approximate $32,512,000 originated in fiscal year 2008. The nationaltrend in the amount students and families borrowed in alternative education loans for the 2008-2009academic year reflects a decline of nearly 50%. Several factors have contributed to the decrease in loanvolume for MELA and many other lenders with alternative education loan programs. The most significantfactors include: 1) increased limits for Federal education loans and grants; 2) stricter credit underwritingcriteria as a result of the credit crisis; 3) increased interest rates due to capital market conditions and costof funds; 4) requirement of interest only payments versus full deferment while enrolled in school; 5) issuessurrounding access to capital; and 6) Federal legislation regarding preferred lender lists. It is expected that

there will be a continuing demand for supplemental student loans for a number of reasons, including the impactof the current economic conditions on state funding for higher education, college and university endowments,home values and home equity, and individual wealth. In addition, the rising cost of attendance at highereducation institutions requires increased borrowing by students and their families.

On May 29, 2009, MELA issued its $210,000,000 Series 2009A student loan revenue and refunding bonds.As a result of MELA’s 2009 bond issue, the Authority was able to replace its $136,500,000 in auction rate bondfinancing for its alternative education loan program with a more stable financial structure secured bya capital reserve fund. The restructuring to fixed rate bonds also provides a more stable interest rate for MELAborrowers. MELA is thankful to have received your support and that of the Legislature last year in the formof increased moral obligation backing of the Authority’s debt. Without this increased State support for MELA,the Authority would not have had a successful bond issue, resulting in no funding for new education loansfor 2009-2010 and beyond and continued failed auctions for its Auction Rate Securities.

Baker Newman and Noyes LLC, an independent certified public accounting firm, recently completedMELA’s financial audit for the 2009 fiscal year. In reviewing the financial statements, it is clear that MELAis in a sound financial position and that the funds MELA has acquired with proceeds from tax-exempt bondsor obligations are being solely utilized for its alternative student loan program.

In summary, MELA looks forward to continuing to fulfill its mission of providing affordable supplementaleducation financing to assist Maine students and families in achieving their higher education goals. MELAconsiders it to be a privilege to continue to partner with the State of Maine in making a college educationmore accessible and affordable for its residents.

Your continued interest in and support of MELA is greatly appreciated.

Sincerely,

Shirley M. Erickson, Ph.D.Executive Director

cc: President of the SenateSpeaker of the HouseMembers of the Joint Standing Committee on Education and Cultural AffairsMembers of the Maine Educational Loan Authority

Governor John E. BaldacciApril 28, 2010Page Two

Table of Contents Page

Authority Members 5

2009 Program HighlightsIntroduction and Background Information 6Program Administration: Loan Origination and Servicing 7Application Volume and Distribution 8Loan Volume 8Borrower Distribution 8Summary 8Charts and Graphs 9-17

2009 Financial InformationIndependent Auditors’ Report 19Management’s Discussion and Analysis 20-26Basic Financial Statements

Statements of Net Assets 27Statements of Revenues, Expenses andChanges in Net Assets 28

Statements of Cash Flows 29-30Notes to Financial Statements 31-42

Additional InformationSchedule 1 44

Maine Educational Loan Authority(MELA)

Authority Members

Christopher Bell, ChairDirector of Financial Aid

University of Maine at Presque Isle

Anne Connors, Vice ChairDirector of Financial Aid

Kennebec Valley Community College

David Mahoney, Secretary/TreasurerAssociate Director of Student Financial Services

Bates College

Bruce N. Schatz, CPAConsultant

Elizabeth DoaneGuidance Counselor

Yarmouth High School

David LemoineTreasurer

State of MaineEx-Officio

STAFF

Shirley M. Erickson, Ph.D.Executive Director, MELA

5

MELA 2009 Program Highlights

I. INTRODUCTION AND BACKGROUND INFORMATION

The Maine Educational Loan Authority (MELA) is a quasi-governmental agency that was created andestablished by Maine legislation in April of 1988 (20-A M.R.S.A., Section 11414). MELA functions as anadministratively independent authority within the current organizational structure of State government,and receives no appropriation from the Legislature for its operation. MELA is governed by a seven-memberboard appointed by the Governor and confirmed by the Legislature, except for the State Treasurer who servesas an ex-officio member.

MELA was established to assist students and their families in achieving their higher education goals byproviding a supplemental or alternative student loan program. Alternative student loans exist to bridge thegap between the full cost of a higher education and traditional financial aid resources. MELA’s alternativestudent loan programs currently consist of The Maine Loan® and The Maine Medical LoanSM. The Maine Loanallows borrowers to borrow up to the full cost of an undergraduate or graduate education less other financialaid. This loan is available to Maine residents attending approved schools in the United States and Canada,and out-of-state students attending approved schools in Maine. In 1998 MELA introduced The Maine MedicalLoan, designed to assist Maine students pursuing a Doctor of Medicine or Doctor of Osteopathic MedicineDegree. On June 1, 2002 MELA expanded its medical loan program to include these additional degrees: Doctorof Chiropractic (DC), Doctor of Dental Medicine (DMD), Doctor of Optometry (OD), Doctor of Podiatric Medicine(DPM), Doctor of Veterinary Medicine (DVM) and Doctor of Dental Surgery or Doctor of Dental Science (DDS).The Maine Medical Loan allows borrowers to borrow up to the full cost of a medical program of study lessother financial aid. This loan is available to Maine residents attending approved medical schools in the UnitedStates and Canada, and out-of-state students attending approved medical schools in Maine.

The Maine Loan and The Maine Medical Loan are available to students and their parents based on thecredit-worthiness of the applicant(s). MELA’s loan programs have many attractive features including a lowvariable interest rate that is adjusted annually (currently 8.43% for The Maine Loan and The Maine MedicalLoan), a low guarantee fee, no annual or aggregate borrowing limits, a wide range of flexible repaymentterms up to twenty-five years, the ability to apply online, and personalized customer service based in Maine.

All MELA loans have historically been funded with the proceeds of tax-exempt bonds or obligations, and noState monies are allocated to fund the program. MELA secured its initial funds through a $35 milliontax-exempt bond issue in July of 1988. In May of 1992, MELA refunded its initial offering and issued $60million worth of tax-exempt bonds. An additional $12.5 million, $10 million, $14 million, and $10 millionof tax-exempt bonds were issued in June of 1996, July of 1997, January of 1999, and September 2000,respectively. In November of 2002 MELA issued $26.9 million worth of tax-exempt bonds, including $16.9million in refunding debt and $10 million in new money. MELA issued an additional $30 million worth oftax-exempt bonds in 2005 and an additional $50 million was issued in 2007. The wide spread turbulence inthe capital markets adversely impacted MELA’s ability to issue a bond in 2008. MELA has historically fund-ed the origination of its student loans through debt issuances in the capital markets in the form of AuctionRate Securities (ARS). The ARS markets have closed down due to the volatility of the capital markets andmovement of investors to safer investments.

6

In order to fund 2008-2009 academic year disbursements, MELA secured interim financing in the form of a$20 million tax-exempt line of credit with TD Bank, N.A. This interim financing required changes to theterms of MELA's loan programs, with the most significant change being the elimination of full principal andinterest deferment for The Maine Loan borrowers. Principal payments continue to be deferred while thestudent is enrolled at least half-time, but interest payments are now required while the student is in school.This change is a nationwide shift in the student loan industry and is in the best interest of the student toreduce the overall cost of repaying their loans.

MELA issued $210 million in tax-exempt fixed-rate bonds in May 2009. The proceeds from the 2009 bondissue were used to refund $136,500,000 of ARS and $15,750,000 outstanding on the tax-exempt line ofcredit, as well as provide additional funds for new loan disbursements and reserves. MELA’s 2009 bond issuewas the first tax-exempt bond issue secured solely by alternative loans since the fall of 2008.

MELA has disbursed alternative student loans totaling over $250 million (Table 1) since the Authority wasestablished in 1988.

II. PROGRAM ADMINISTRATION: LOAN ORIGINATION AND SERVICING

The Maine Educational Loan Authority (MELA) currently has four primary contractual relationships for theadministration of its programs and services. MELA contracts with Maine Education Services (MES) forpersonnel, administrative and marketing services. MES, an independent, private non-profit corporationlocated in Portland, Maine, provides opportunities and resources for people to achieve higher education.MELA also contracts with the Pennsylvania Higher Education Assistance Agency (PHEAA) for the servicingof loans derived prior to 1996. PHEAA, an agency of the Commonwealth of Pennsylvania, located inHarrisburg, manages state grant, guaranty, servicing, and financial aid processing systems. In addition,MELA contracts with Nelnet, Inc. (Nelnet) for servicing of all MELA loans since 1996. Nelnet, a publiclytraded corporation based in Lincoln, Nebraska is an integrated educational finance organization offeringservices in student loan generation and servicing, secondary market services, and guarantor servicing sup-port. Firstmark Services, LLC, assumed loan servicing responsibilities from Nelnet under a subcontractarrangement in 2005. Firstmark, a wholly-owned subsidiary of Nelnet, specializes in the servicing of alter-native loans with offices in Woodbury, Minnesota and Lincoln, Nebraska.

MES performs customer service and all responsibilities associated with the loan origination processincluding inquiry, application, approval or denial, and disbursement stages. In addition, MES manages allaspects of the existing loan servicing contracts including compliance with due diligence strategies,fulfillment of monetary contractual obligations, and monitoring the quality of customer service. MESprovides administrative oversight to or directly performs the duties required of MELA in connection withthe existing tax-exempt bonds and the issuance of new bonds. General financial advisory and supportservices are also provided to MELA by MES.

MELA recognizes that its borrowers are its most valuable asset. MELA’s goal is to provide the bestsupplemental loan program in the country, and quality customer service is one of the most importantcomponents of any loan program. Monitoring the level of customer service provided to its borrowers hasbeen of the utmost importance to MELA.

MELA proudly boasts a very low cumulative default rate of 1.60%, as a percentage of loans in repayment.The MELA default rate has been historically low.

Customers continue to have access to their loan information by calling the toll free number 1-800-922-6352or via MELA’s web site at www.mela.net.

7

III. APPLICATION VOLUME AND DISTRIBUTION

MELA processed 3,321 loan applications for the 2009 calendar year (Table 2). The application materials aremailed to current and prospective borrowers each spring. It is important that students and their families areprovided with application materials as early as possible so that they can have maximum latitude indetermining their funding resources. Since 1996, borrowers have been able to apply for loans directly onlinevia the Internet. An increasing number of borrowers are utilizing the online application process. MELA’s loanapproval rate has ranged between 51%-65% for applications received (Table 2), with an average approvalrate of 60% for the most recent five year period. For 2009 the approval rate was 51%, a significant decreasefrom 2008, due to a combination of stricter credit underwriting criteria and worsening consumer credit bothcaused by the current economic conditions.

IV. LOAN VOLUME

MELA’s loan volume decreased from the previous year with disbursements of $22.4 million for 2009compared with $32.5 million for 2008 (Table 3), excluding the MELA Private Consolidation Loan volume.During 2009, MELA made 3,770 loan disbursements resulting in an average disbursement size of $5,946.

Maine schools continue to be the biggest beneficiary of MELA loans with sixty-four percent (64%) of allMELA funds disbursed in 2009 (Table 3).

Fifty-seven percent (57%) of MELA funds disbursed for this calendar year went to private schools (Table 4).This trend has shifted from the mid to upper 60% range over the past five years.

Table 5 reflects the cumulative percentage of funds disbursed between all public and private schools from1988 to 2009. This breakdown, showing 38% of funds being used for public schools and 62% of funds forprivate schools is largely a reflection of the cost of attendance being higher for private institutions ascompared to public institutions.

The Maine Medical Loan disbursements were $649,716, $1,527,211, $840,633 and $1,435,038 for 2009, 2008,2007 and 2006 respectively. The University of New England is the primary school beneficiary of this program.

V. BORROWER DISTRIBUTION

In the 2009 calendar year, as in the past, the majority of MELA disbursements (64%) have been made toMaine schools (Table 6). This calendar year shows a shift in serving more public than private schools insideMaine (Table 7). For out-of-state schools (Table 8), the percentage of disbursements to private and publicschools has remained relatively consistent from the prior year.

VI. SUMMARY

For the past 21 years, the Maine Educational Loan Authority (MELA) has provided over $250 million dollarsin student loan disbursements primarily through The Maine Loan and The Maine Medical Loan programs.By offering a low-cost alternative education loan program, MELA has assisted thousands of Maine studentsto achieve their goal of a higher education. As the State of Maine continues to work to increase thepercentage of its residents possessing college degrees, MELA’s student loan program will remain animportant financial aid resource for Maine students and their families. MELA looks forward to continuing topartner with the State of Maine and the higher education community to ensure that a college education isboth accessible and affordable for Maine residents.

8

MELA Charts and Graphs

Table 1 MELA Total Loan Volume byLoan Period (1988-2009)

Table 2 MELA Application Volume byLoan Period (1999-2009)

Table 3 Percentage of MELA Funds Disbursed toIn-State/Out-of-State Schools (1999-2009)

Table 4 Percentage of MELA Funds Disbursed toPublic/Private Schools (1999-2009)

Table 5 Cumulative Percentage of MELA Funds Disbursedto Public/Private Schools (1988-2009)

Table 6 Percentage of MELA Disbursements toIn-State/Out-of-State Schools (1999-2009)

Table 7 Percentage of MELA Disbursements toPublic/Private Maine Schools (1999-2009)

Table 8 Percentage of MELA Disbursements toPublic/Private Out-of-State Schools (1999-2009)

9

MELA Total Loan Volume (1988-2009)

Table 1$250

225

200

175

150

125

100

75

50

25

0

1988-2003 2004 2005 2006 2007 2008

Volu

me

(in

millions)

10

2009

$250.2

$107.6

$120.2

$138.1

$193.8

$161.8

$227.8

MELA Application VolumeBy Loan Period (1999-2009)

Table 2

Approvals Denials

11

5200

4800

4400

4000

3600

3200

2800

2400

2000

1600

1200

800

400

0

Vo

lu

me

99 00 01 02 03 04 05 06

332149%

51%

35%

65%

1088

61%

1378

39%

2517

38%

3668

37%

4647

41%

59%

63%

39%

61%

1998

39%

61%

1319

4199

37%

63%

61%

1168

39%

62%

4890

37%

63%

0807 09

Percentage of MELA Funds Disbursed ToIn-State/Out-of-State Schools (1999-2009)

Table 3

In-State Out-of-State

30

24

18

12

6

Volum

e(in

millions)

Note: The decreased volume in 2002 is attributed to The Maine Loan being disbursed in twodisbursements beginning June 1, 2002, with many second disbursements occurring in January 2003.Total loan origination volume for 2002 was $7.0 million. MELA Private Consolidation volume of $928,047in 2006, $2,356,830 in 2007, and $1,537,963 in 2008 is excluded.

12

0899 00 01 02 03 04 05 06 09

64%

$22.4

36%

45%

55%

$6.5

44%

56%

$6.042%

58%

$7.2

36%

64%

$12.5

36%

64%

$17.9

45%

55%

$9.5

37%

63%

$22.8

41%

59%

$5.1

64%

$29.6

36%

64%

$32.5

36%

07

Percentage of MELA Funds Disbursed ToPublic/Private Schools (1999-2009)

Table 4

Public Schools Private Schools

Note: The decreased volume in 2002 is attributed to The Maine Loan being disbursed in twodisbursements beginning June 1, 2002, with many second disbursements occurring in January 2003.Total loan origination volume for 2002 was $7.0 million. MELA Private Consolidation volume of $928,047in 2006, $2,356,830 in 2007, and $1,537,963 in 2008 is excluded.

13

30

24

18

12

6

Volum

e(in

millions)

0899 00 01 02 03 04 05 06 09

43%

$22.4

57%

68%

32%

$6.5

71%

29%

$6.067%

33%

$7.2

65%

35%

$12.5

69%

31%

$17.9

36%

$29.6

71%

29%

$9.5

66%

34%

$22.8

72%

28%

$5.1

64%

36%

$32.5

64%

07

Cumulative Percentage of MELA FundsPublic/Private Schools (1988-2009)

Table 5

Public Schools Private Schools

Total = $245.3 million

14

$93.4 million

38%

$151.9 million

62%

$200

180

160

140

120

100

80

60

40

20

0Volum

e(in

millions)

Note: MELA Private Consolidation Loan volume of $928,047 in 2006, $2,356,830 in 2007, and $1,537,963in 2008 is excluded.

Percentage of MELA Disbursements toIn-State/Out-of-State Schools (1999-2009)

Table 6

In-State Out-of-State15

99

00

01

02

03

04

05

06

07

08

09

0% 25% 50% 75% 100%

36%

64%

39%

38%

40%

35%

42%

36%

36%

37%

36%

36%

64%

60%

62%

61%

65%

58%

64%

64%

63%

64%

Percentage of MELA Disbursements toPublic/Private Maine Schools (1999-2009)

Table 7

Public Private16

99

00

01

02

03

04

05

06

07

08

09

0% 25% 50% 75% 100%

57%

43%

47%

46%

46%

46%

39%

48%

42%

37%

46%

46%

52%

54%

54%

54%

61%

58%

63%

54%

54%

53%

17

Percentage of MELA Disbursements toPublic/Private Out-of-State Schools (1999-2009)

Table 8

Public Private

99

00

01

02

03

04

05

06

07

08

09

0% 25% 50% 75% 100%

22%

78%

20%

80%

24%

76%

22%

78%

25%

75%

25%

75%

24%

76%

21%

79%

19%

81%

21%

79%

21%

79%

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44