State agencies guaranteeing college student loans say that a provision in the deficit-reduction package approved by Congress last week, which requires them to turn over $250 million in "excess" reserves to the federal government, may force some agencies to close and could hurt an already troubled student loan program.
The agencies argue that they need the cash reserves to continue operating and to fulfill minimum reserve requirements established by lenders and others with whom they hold contracts. Several agencies have indicated they will appeal the payments, many are considering legal action and South Dakota's agency has decided it will not guarantee new loans or turn over the funds.
"It's a very serious problem," said Jean Frohlicher, executive director of the National Council of Higher Education Loan Programs. "I'm not at all sure . . . that all the agencies will be able to survive."
The Education Department and congressional supporters of the provision argue that the agencies have not proven that they will be harmed and dismiss contentions that the federally guaranteed loan program or the low-income students it serves will suffer. Even if some agencies close, they said, others will step in to guarantee new loans.
"People are trying to manufacture arguments why they should be sitting on vast sums of federal money, taxpayers' dollars," said Bruce M. Carnes, deputy undersecretary of education. "These guarantee agencies have considerable surpluses . . . they should be giving it back."
The federal student loan program has been troubled by soaring default rates, prompting the Education Department and Congress to threaten to exclude from the program schools with large numbers of student defaulters. When a student defaults, the guarantee agencies repay the lender, then the agency is repaid by the federal government.
The new provision instructs the Education Department to collect from guarantee agencies any cash reserves that exceed standards established by the General Accounting Office. The states are expected to repay about $190 million advanced to them by the Education Department. About 80 percent of the advances remain outstanding, according to the GAO.
While the guidelines allow some state agencies to keep their reserves -- some are required by state law to maintain minimum reserves -- others will be asked to turn over the bulk of the cash they have on hand. Virginia will be assessed the largest amount, nearly $30 million of the $36 million the GAO says the state held in cash reserves as of last year.
Muriel Johnson Murray, executive director of the Virginia State Education Assistance Authority, said she believes her agency will survive, assuming defaults do not increase and costs are held down. But she said the cash reserves have allowed the agency to provide services that keep down defaults, such as tracking students and notifying borrowers that they are delinquent in their payments. If those services are no longer provided, defaults could rise, with the cost to the federal government also rising.
"It's blue smoke and mirrors," Murray said of the provision. "A lot of the parties involved are aware that it's not feasible, but it gives them, on paper, the $250 million they were looking for."
South Dakota's guarantee agency, the Educational Assistance Corp., will not turn over the $8.7 million in reserves demanded by the federal government, nor will it guarantee any new loans from the time President Reagan signs the law, according to David Reicher, an attorney who represents the agency. He said payment would force the agency to go below a minimum reserve established by lenders and bondholders.
"This is a change in the program that we're not agreeing to at this time," Reicher said. "This law is so bad, it's inequitable the way it's applied."
Congressional staff members predicted that Congress would be forced to revisit the issue next year because of such problems. Sens. Edward M. Kennedy (D-Mass.) and Orrin G. Hatch (R-Utah), chairman and ranking minority member of the Labor and Human Resources Committee, which has jurisdiction over the federal loan program, issued a joint statement expressing "grave concerns about the impact of the . . . proposal on the viability of some guarantee agencies and, thus, on the stability of the GSL program as a whole."