Feb. 21, 2006

Loans for Sale

Some state governments that face cash crunches are looking to student loan agencies for money — which critics warn could be a shortsighted strategy.

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In his budget presentation last week, Gov. Ed Rendell of Pennsylvania announced that he wants the Pennsylvania Higher Education Assistance Agency to pony up $100 million from its operating revenue over five years for computers in high schools and to raise other money for capital projects at community colleges.

Charles Ardo, a spokesman for the Democratic governor, said that Rendell “feels this fits nicely with PHEAA’s greater mission” of increasing access to higher education. “Laptops will certainly help students be prepared [for college],” Ardo said.

But officials of the student loan agency officials aren’t so sure. Keith New, a PHEAA spokesman, said that most of its earnings are already slated for particular programs, “be it loan forgiveness, or discounting student loans,” New said. Plus, PHEAA recently announced $72.5 million in additional student grants for next academic year, which will raise the average state grant award by about $500. New said the grant supplement was made possible by the growth in PHEAA’s loan portfolio. “If the money is redirected, you would not have that support,” New said.

The Pennsylvania agency’s operating revenue was $148 million last year, and New said that $135 million of that went straight back to student programs. PHEAA is an independent agency, and the governor does not control its budget. Sixteen of PHEAA’s 20 board members are state legislators.

Rendell isn’t the only governor with his eye on a state student loan agency. The University of Illinois has endorsed Gov. Rod Blagojevich’s proposal to sell off part of the Illinois Student Assistance Commission’s student loan portfolio, in return for the university receiving an additional $10.4 million in state funding for the 2007 fiscal year. Blagojevich wants to sell all or part of the state’s student loan portfolio to fund a $90 million tuition tax credit for college freshmen and sophomores who maintain at least a B average. As it is currently planned, the tuition tax credit would apply to all students regardless of need.

According to Thomas P. Hardy, a spokesman for the university, the money would allow the university to hire more faculty and replace some of the courses that were cut in the last four years as state funding decreased or stayed flat. The university agreed to the proposal only on the condition that loan terms for students would not change. That, however, is not assured. Rep. Naomi Jakobsson has introduced a bill that would make sure students, at least those with currently outstanding loans, do not have the terms of their loans changed.

In Missouri, Gov. Matt Blunt, with the support of presidents from public institutions, is pushing to have the Missouri Higher Education Loan Authority sell about $2.4 billion in student loans to raise hundreds of millions for endowed professorships, scholarships, and campus building projects.

Some experts question the foresight of policy makers who want to put student loans in private hands. “It’s a way to get money for projects without raising taxes,” said Mark Kantrowitz, publisher of Finaid.com, an online guide to student financial aid. Kantrowitz said that colleges are pushing for loan sales because they will “see a one-time funding increase,” but he said it could be a shortsighted move. “You’re selling an income producing asset, probably for less than it’s really worth, just to get some cash now.”

Sallie Mae, which controls more than a third of all outstanding student loans in the country, sought to buy PHEAA in the past, and is currently looking to buy parts of MOHELA’s loan portfolio. Interest rates on federal student loans are fixed, so Sallie Mae – which has made campaign contributions to both governor Blunt, and his father U.S. Rep. Roy Blunt (R-MO), according to campaign finance documents – could not raise rates, but it could decide not to discount loan fees, as state agencies currently do, costing students hundreds to thousands of dollars over the lifetime of a loan.

According to Securities and Exchange Commission filings, Sallie Mae informed its stock holders that, in some cases, it had to discount fees to stay competitive with state agencies and nonprofit organizations. Student loan experts said that, as soon as it is able, Sallie Mae, or any company that acquires state student loans, could decide to charge fees.

Sallie Mae officials could not be reached for comment.

— David Epstein

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