WASHINGTON - Many state agencies that guarantee student loans are worried they will become insolvent in the next few years as a result of legislation passed in August that mandates cuts in their revenue streams, state officials and lobbyists say.
"Several agencies have suggested that the cumulative impact of the subsidy reductions will be to create widespread insolvency in the guaranty agency community," the Consumer Bankers Association said in a recent edition of its newsletter, CBA Reports.
Financial problems for those agencies would be a concern to the municipal market because many of the guarantors also operate as secondary markets for student loans.
In that capacity, agencies issue tax-exempt student loan bonds to purchase. loans from banks, thus freeing up money for additional loans. Lobbyists and a rating agency official said they did not have figures for how many guarantors are also student loan bond issuers.
The head of one state agency, who requested anonymity, said that although his agency is forecasting it can remain solvent for five years, "We're looking at some losses." The official said that "there is a real general concern" among guarantee agencies that they will become insolvent.
In another state, "The dire case prediction has us rapidly depleting our reserves beginning next year," said an education official who asked not to be identified. "We can't continue for very long that way."
There is enough concern among the more than 40 state guarantors about their financial health that last month 20 of those agencies, along with one private guarantor, wrote to Secretary of Education Richard W. Riley to state their concerns about the legislative changes.
Those changes "will cause serious financial difficulties for guarantors," the agencies said in their letter. "The cumulative effect of these changes is indeed devastating," they said. "The only way we could operate long-term under the new provisions would be to invade our reserves."
The legislative changes were added to President Bill Clinton's budget and tax package by the congressional education committees, which were charged with finding several billion dollars of cost savings in programs under their jurisdiction.
Originally, the committees expected to reach their cost-savings target mainly by approving a plan to phase in direct lending by colleges. But in a compromise with opponents of direct lending the committees agreed to slow the phase-in, forcing them to make extra budget cuts in the current system, known as the Guaranteed Student Loan program.
Several lobbyists said the most severe cut is a decrease in the maximum insurance premium the guarantee agencies are allowed to charge to 1% of the loan amount from 3%.
Another problem involves a so-called administrative cost allowance, which until this year the federal government was required to pay to the guarantee agencies.
The bill passed in August eliminates the statutory requirement that the allowance be paid. Although congressional staff members have assured state officials that Congress wants to see the payment continue, the officials are worried that the Department of Education will choose to forgo it.
Congress also lowered the amount on each student loan that will be reinsured by the federal government.
Under the Guaranteed Student Loan program, guaranty agencies back the loans, making lenders whole if a loan goes into default. The agencies then file claims with the federal government, which before this year, paid 100% of a claim as long as an agency's default rate did not go above. a certain level. Under the new law,., the federal,government will pay a maximum of only 98%..
Although the letter was directed to Riley, the changes the groups want would have to be made by Congress. They include statutory assurance that the administrative cost allowance would be paid and an increase in the maximum insurance premium the agencies are allowed to charge.
"We don't think it was the intent of Congress to cut so deeply into the reserves of guarantors as to push them in the direction of insolvency," said Susan Conner, vice president of public affairs for united Student Aid Fund Inc.
United Student Aid Fund is a private nonprofit organization that is the largest student loan guarantee agency in the country, and the only nationwide guarantor. The organization is leading the fight to ease the legislative changes, even though it is large enough that it would be "among the last to suffer, negative consequences," Conner said.
Conner said guaranty agencies still have a measure of optimism that we will be able to effect some changes" in the new law in the near future. But a Senate education aide was less Optimistic."there's really no Possibility to do that this year," the aide said.
"There's a real sense now that we don't want to tamper with" the new law before next year, the aide said. He noted that Congress may consider drafting a technical corrections bill next summer, which could become a vehicle for the changes sought by the guarantors.