March 24 (Bloomberg) -- Brazos Higher Education Service Corp., the fourth-largest holder of guaranteed student loans in the U.S., suspended making new loans after higher interest rates and lower federal subsidies cut its profits.

Brazos Higher Education Service holds more than $15 billion in federally guaranteed student loans, including $7 billion it permanently financed through the sale of auction-rate securities. It is among 26 companies that stopped providing student loans through the Federal Family Education Loan Program according to Finaid.org, a student financial aid publication.

``We regret this decision was necessary,'' Murray Watson, president and chief executive officer at Waco, Texas-based Brazos Higher Education Service, said in a statement today. ``We hope this situation with the capital markets changes in the near future to let us re-enter student lending.''

More than 10 million students receive federal loans from about 2,000 lenders, U.S. Education Secretary Margaret Spellings told the House Education and Labor Committee at a hearing on March 14. She said the Bush administration is ready to increase the volume of direct loans if private student lenders who rely on federal guarantees leave the market.

The president on Sept. 27 signed legislation cutting subsidies to student-loan providers by $20.9 billion over the next five years, redirecting the money to student aid.

Brazos Higher Education Service, a 33-year-old non-profit, said it will stop making new loans after March 26 through its affiliates: Brazos Student Lending, Academic Finance Corp., Educational Funding Services Inc. and Acapita. It said it will honor second and third disbursements on loans it made before March 27.

Exhausted Credit Lines

Brazos Higher Education Service has exhausted the lines of credit it traditionally uses to fund student loans and also can no longer repackage and sell the loans it makes because of lack of investor demand, according to Ellis Tredway, a company spokesman.

The company's investment banks are exploring converting the auction-rate securities it has sold into a different type of debt, Tredway said. The market for auction bonds collapsed last month after insurance companies backing the debt were downgraded and bankers stopped buying the bonds for their own accounts amid weak investor demand.

Auction-rate bonds were supposed to be the cheap alternative to traditional long-term debt, with interest rates reset every 7 to 35 days on long-term debt. Thousands of auctions have failed from lack of bids, triggering penalty terms that sometimes raise annualized interest rates fourfold in one week.

The average rate for auction bonds was 6.56 percent as of March 19, after reaching a record 6.89 percent on Feb. 20, according to the Securities Industry and Financial Markets Association. The rate averaged 3.81 percent during the previous 12 months.

To contact the reporter on this story: Michael McDonald in Boston at Mmcdonald10@bloomberg.net

Last Updated: March 24, 2008 13:39 EDT