Feds Quash Non-Profit Student Loan Money

AUG. 3, 2010

By EVELYN STACEY

On July 30 the U.S. Department of Education quashed California’s plan to sell EdFund, the non-profit student-loan guarantor. Ed Fund was created in 1997 as the state loan guaranty agency under the Federal Family Education Loan (FFEL). The organization works as a non-profit public benefit corporation, based in the Sacramento area, to distribute federal student loans. If student default on those loans, EdFund is back by the federal government and any additional funds go towards California’s Cal Grant program.

This year, EdFund was  to be sold in hopes of raising nearly $1 billion to offset the growing $19 billion state deficit. Governor Arnold Schwarzenegger first floated the idea back in 2007. State legislators were counting on the money being available.

But some estimates have emerged noting that the original billion dollars  expected to be raised has plummeted in the recession. The state Department of Finance has not yet disclosed any current estimates of what could be raised.

In 2009, the President’s Budget proposal eliminated the use of private institutions for student loans. On April 9, 2009, a letter from CSAC and EdFund to the Legislature acknowledged confusion. “There are not many details yet regarding the President’s Budget,” said the letter. “Consequently, there are some questions as to what role, if any, the Commission as a Guaranty Agency will have under the new proposal.”

As of July 2010, a provision contained in the recent federal healthcare reform bill states that all student loans must be distributed directly through the U.S. Department of Education, eliminating the FFEL program entirely. The provision ultimately cuts all private lenders including banks, EdFund and other non-profits from granting federal student loans.

Such action raises questions for CASC and the ability to continue distributing Cal Grants.  EdFund, when a student loan defaults, is still backed by the federal government. “The funds that are earned [by EdFund] go towards funding Cal Grants,” said Janet McDuffy of the CSAC. ” If they take that away those funds are no longer available. It is a small amount but considering state of the budget it all counts.”

According to The National Association of Student Financial Aid Administrators, there was a10 percent increase in Cal Grants distributed in 2009-10, a total of 273,000 students at more than $1 billion to fund. David Richey, a spokesman for Education Secretary Bonnie Reiss, did confirm that the federal government’s decision will not affect student financial aid.

“The Department of Education is working closely with California to ensure that the interests of students and taxpayers are protected,”  said Jane Glickman, who is also with the department on Monday. “While we are engaged in a series of ongoing conversations on this issue, it’s premature to comment.”  The Sacramento Bee, however, reported that the federal department does plan on ending business with EdFund by Oct.31.

EdFund has released a response saying it will continue to pledge “to the students, families and colleges who rely on us that they will continue to receive the same high quality products and services that have distinguished EdFund within the higher education community.”

“EdFund did not expect the decision by the U.S. Department of Education,” said MaryAnn Kelly, who works with EdFund. Kelly added that her organization has promised their “full cooperation to the U.S. Department of Education and to the successor guaranty agency for the State of California to ensure a smooth and seamless transition for the six million borrowers that we serve.”