[Congressional Record Volume 141, Number 154 (Friday, September 29, 1995)]
[Senate]
[Pages S14701-S14702]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




     GIVEAWAY TO SPECIAL INTERESTS IN REPUBLICAN STUDENT LOAN BILL

  Mr. KENNEDY. Mr. President, earlier this week the Republican majority 
in the Senate Labor and Human Resources Committee voted to cut $10.8 
billion from student loans over the next 7 years. This bill is bitter 
news for students and their families, who will see their student loan 
costs rise by as much as $7,800 per family. But the champagne corks are 
popping for banks and other special interests in the student loan 
industry, because the same Republican majority also voted a $1.8 
billion sweetheart deal for them.
  Tucked in the legislation is a series of provisions that sign over 
$1.8 billion in Federal funds to the guaranty agencies in the student 
loan program. That $1.8 billion should be used to ease the burden of 
the budget cuts on students and their families. It should not be used 
to bestow an unjustified windfall on the special interest student loan 
industry.
  This new windfall comes with no strings attached. Guaranty agencies 
can use it to build new palaces for their headquarters, or to pad the 
salaries of their executives, which for one official already exceeds 
$600,000 a year. They can even literally take the money and run. Under 
current law, if a guaranty agency goes out of business, the reserve 
funds that it has accumulated under the Federal student loan program 
are returned to the American taxpayer. Under this new giveaway, the 
officers and directors of a guaranty agency could close down the agency 
and keep the funds for themselves.
  Forty-one guaranty agencies participate in the Federal student loan 
program. They function as middlemen between the banks, who loan funds 
to students, and the Federal Government, which bears the risk on the 
loans. The guaranty agencies maintain records on student borrowing, 
collect on defaulted loans, and advance funds to lenders for defaulted 
loans. The guaranty agencies are reimbursed by the Federal Government 
for those advances. The agencies are then permitted to pursue the 
defaulted debts, and keep 27 cents of every dollar over and above the 
reimbursed amount.
  In the course of the past three decades, the guaranty agencies have 
accumulated $1.8 billion in what are called reserves. These reserves 
began with seed money advanced to the guaranty agencies by the Federal 
Government in the early years of the loan program, of which $40 million 
now remains. Since then, the agencies have accumulated $1.8 billion in 
additional reserves from other sources. Ninety-eight percent of those 
reserves come from insurance premiums paid by students under the 
Federal student loan program, payments received from the Federal 
Government for default claims and administrative expenses, and 
investment earnings on the reserve funds.
  The reserves were originally intended as a financial cushion to 
enable the guaranty agencies to have enough funds to cover defaults in 
the student loan program. Now, however, the Federal Government bears 
virtually all the risk on the loans, and the cushion is no longer 
needed. There is no doubt that the reserves are federal funds. They 
certainly do not belong to the guaranty agencies. If the Federal 
Government were to take back the reserves, the Congressional Budget 
Office would score the reclaimed reserves as a savings to the taxpayer 
of $1.8 billion.
  The Republican student loan bill, however, does exactly the opposite. 
Rather than reclaiming the reserves in order to reduce cuts in student 
aid or to reduce the deficit, the bill turns over to the guaranty 
agencies--no strings attached--all but the $40 million of taxpayer 
funds originally given to the agency reserve accounts. Secretary of 
Education Riley has called this giveaway ``an alarming development that 
would further exacerbate the current problems in the student loan 
industry.''
  I urge the Senate to block this $1.8 billion Republican raid on the 
student reserve funds. It is unconscionable for the Republican majority 
to slash $7.6 billion from student loans, while sneaking $1.8 billion 
out the back door and into the pockets of the very people who have 
profited for more than 30 years on the backs of students. This is 
corporate welfare of the worst kind, and the Senate should reject it.
   I ask unanimous consent that a letter on this issue from Secretary 
Riley and a memorandum from General Counsel Judith Winston of the 
Department of Education be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                     U.S. Department of Education,


                                                The Secretary,

                               Washington, DC, September 28, 1995.
     Hon. Edward M. Kennedy,
     U.S. Senate,
     Washington, DC
       Dear Senator Kennedy: I am writing to express my serious 
     concern about a particular provision of the Student Loan 
     amendments recently passed by the Senate Committee on Labor 
     and Human Resources as part of its budget reconciliation 
     package. In particular, under the guise of strengthening 
     guaranty agency reserves, Section 1004(e)(2) of the bill 
     would have the effect of giving away approximately $1.8 
     billion in Federal assets to non-profit and State guaranty 
     agencies.
       An analysis of the effect of the proposed change on the 
     Federal interest in the guaranty agency reserve funds by the 
     department's General Counsel is attached for your 
     consideration. In my view, enactment of this 

[[Page S 14702]]
     change would be an alarming development that would further exacerbate 
     the current problems in the student loan program. I urge the 
     Committee to reconsider this decision.
       I am sending an identical letter to Senator Kassebaum.
           Yours sincerely,
                                                 Richard W. Riley.
       Attachment.
                                     U.S. Department of Education,


                                Office of The General Counsel,

                               Washington, DC, September 28, 1995.


                               MEMORANDUM

     To: The Secretary
     From: Judith A. Winston, General Counsel
     Subject: Guaranty Agency Reserves

       Earlier this week, the Senate Committee on Labor and Human 
     Resources approved certain changes to the statutory 
     provisions relating to the Federal Family Education Loan 
     (FFEL) Program in connection with the budget reconciliation 
     bill. One of the approved provisions would make significant 
     changes in the status and ownership of guaranty agency 
     reserve funds. If enacted, these changes would cede Federal 
     ownership of more than $1.7 billion in funds and assets to 
     state or private non profit agencies.
       In particular, the bill passed by the Committee would make 
     significant changes to Sec. 422(g) of the Higher Education 
     Act of 1965, as amended (HEA). Currently Sec. 422(g) reflects 
     numerous Federal court decisions that the reserve funds of 
     the guaranty agencies are Federal property which is held by 
     the guaranty agency as a trustee of the funds for the general 
     public. See Puerto Rico Higher Education Assistance Corp. v. 
     Riley, 10 F.3d 847, 851 (D.C. Cir. 1993); State of Colorado 
     v. Cavazos, 962 F.2d 968, 971 (10th Cir. 1992); Rhode Island 
     Higher Education Assistance Auth. v. Secretary, U.S. Dep't of 
     Education, 929 F.2d 844 (1st Cir. 1991); Great Lakes Higher 
     Education Corp. v. Cavazos, 911 F.2d 10 (7th Cir. 1990); 
     Education Assistance Corp. v. Cavazos, 902 F.2d 617, 627 (8th 
     Cir. 1990), cert. denied    U.S.   , 111 S.Ct. 246 (1990); 
     Ohio Student Loan Com'n v. Cavazos, 902 F.2d 894 (6th Cir. 
     1990), cert. denied    U.S.   , 111 S.Ct. 246 (1990); South 
     Carolina State Education Assistance Auth Corp. v. Cavazos, 
     897, F.2d 1272 (4th Cir. 1990), cert. denied    U.S.   , 111 
     S.Ct 243; Delaware v. Cavazos, 723 F.Supp. 234 (D. Del. 
     1989), aff'd without opinion, 919 F.2d 137 (3d Cir. 1990). 
     Earlier this month, the United States District Court for the 
     District of Idaho reaffirmed the holding of these earlier 
     decisions that guaranty agencies do not have (and have never 
     had) a property right in their reserve funds. Instead, that 
     court held that the guaranty agencies' reserve funds are 
     Federal property and are subject to the control of the 
     Secretary of Education. Student Loan Fund of Idaho v. Riley, 
     Case No. CV 94-0413-S-LMB (D. Ida., Sept. 14, 1995).
       The bill would essentially give away the overwhelming 
     amount of Federal property included in the guaranty agency 
     reserve funds. Most importantly, the bill would redefine 
     the term ``reserve fund'' to mean ``the Federal portion of 
     a reserve fund''. See Sec. 1004(e)(2) of the Committee 
     bill, p. 38, lines 14-16. The bill would then limit the 
     Federal property to an amount calculated under the formula 
     in Sec. 422(a)(2) of the HEA. The formula in 
     Sec. 422(a)(2) of the HEA would, in most cases, limit the 
     ``Federal portion'' of the reserve fund to the amount of 
     Federal advances maintained by the guaranty agency plus 
     interest. As of September 30, 1994, the amount of 
     outstanding Federal advances was $40 million out of total 
     guaranty agency reserves (all of which came from federal 
     sources or under Federal authority) of more than $1.8 
     billion. See FY 1993 Loan Programs Data Book, at 65, 67. 
     Thus, the Federal government would be relinquishing 
     ownership and control of more than $1.7 billion in federal 
     funds and property.
       Enactment of these proposed changes to the definition of 
     ``reserve fund'' would also effectively end Federal control 
     over the uses of the reserve funds by the agencies. If the 
     reserve funds are the property of the guaranty agency and the 
     agency uses those funds for purposes unrelated to the FFEL 
     program, the Department would have no authority to take 
     action against the agency. Thus, the Department would be 
     unable to take action against an agency that used funds 
     intended to be used to pay lender claims on elaborate offices 
     or high executive salaries. If this provision were enacted, 
     the strong possibility exists that an agency could choose to 
     use reserve funds for non-program purposes and be unable to 
     pay lenders' claims. At that point, the lender would then be 
     able to demand payment from the Department under Sec. 432(o) 
     of the HEA. The Department would have to use taxpayer funds 
     to pay the lenders.
       This proposal would also provide an incentive for some 
     guaranty agencies to leave the program. An agency which left 
     the program would be able to take its reserve fund (minus 
     Federal advances and interest) with it and use it for 
     purposes unrelated to higher education or student loans.\1\ 
     Moreover, those agencies which have already established loan 
     servicing and secondary market operations could use the 
     reserve funds to compete with private parties which provide 
     services in this area.
     \1\ Those agencies which are tax exempt non profits under 
     Sec. 501(c)(3) of the Internal Revenue Code would have to use 
     the funds in accordance with the requirements of that 
     section. However, some agencies have already transferred 
     significant portions of reserve funds to associated non-
     profit companies which may not be tax exempt and thus not 
     bound by those restrictions. Moreover, some state laws appear 
     to allow non-profit corporations which dissolve to distribute 
     remaining assets to members (generally the company's 
     directors) in certain circumstances. See 805 ILCS 105/112.16 
     (Illinois); A.R.S. Sec. 10-2422 (Arizona). In regard to state 
     agencies, it appears that a State could close the guaranty 
     agency, put the reserve funds into its general fund for use 
     for other purposes and leave the Department with the 
     responsibility for paying lenders.

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