Nov. 13 (Bloomberg) -- The ratings on Vermont Student Assistance Corp.'s $19.94 million of general obligation bonds were cut by Moody's Investors Service because of the college lender's use of auction-rate securities to fund loans.

Moody's cut the rating on the bonds, sold in 2003, by two levels to Baa1, its eighth-highest grade, from A2, the New York- based company said in a report. Moody's gave the borrower a negative outlook ``due to the potential for the current liquidity crunch'' to limit its ability to refinance its debt.

The Winooski, Vermont-based lending authority has $1.73 billion of auction-rate securities, long-term debt with rates set weekly or monthly through bidding, and $433.4 million of other floating-rate demand bonds outstanding. Interest-rate swings in the auction-rate market and ``the potential decline in profitability within the student loan market'' led to the rating cut, Moody's said.

The $330 billion auction-rate market collapsed in February when dealers who once routinely bolstered demand with their own bids stepped back amid waning investor appetite for the debt.

Lower ratings can drive up the cost of borrowing as investors demand to be compensated for increased risk. The student lender, which has most of its loans guaranteed by federal insurance, has refinanced $433.4 million of auction-rate securities into other types of floating-rate debt, Moody's said.

To contact the reporter on this story: Darrell Preston in Dallas at dpreston@bloomberg.net.

Last Updated: November 13, 2008 14:33 EST