Private Group Disregards State Demand for Student Loan Data

A Minnesota foundation that is believed to be doing tens of millions of dollars worth of student loan business in California has refused to comply with a new state law designed to control the state’s soaring default rate on government-backed student loans.

Contending that California has no right to regulate its activities, the Higher Education Assistance Foundation has failed to meet a June 30 deadline set by the California Postsecondary Education Commission to supply such information as who is getting the loans, how much they are borrowing and who the lenders are.

The new state law empowers the commission to collect whatever data it needs to monitor the level of student borrowing and to determine which students are most likely to default on their loans.

Gary D. Hays, president of the Minnesota foundation, said his organization will “voluntarily” supply whatever information it can, but only if the new law is repealed. He said the foundation should be free of any legal obligation to provide information that might be too costly to compile or that might violate students’ right to privacy.

Patrick M. Callan, director of the California Postsecondary Education Commission, charged the foundation with “defiance of California law” and said that the foundation wants to participate in a government program without being “accountable to the state.”

Under the federal Guaranteed Student Loan program, banks are encouraged to issue low-interest loans to students. The encouragement comes primarily from state agencies and private organizations, like the Minnesota foundation, that buy up the loans directly or purchase loans that have gone into default.

But there is no real risk for the state agencies and private organizations because the loans are backed by the federal government, which also pays the full interest on the loans while students are in school and a portion of the interest after the student graduates.

As a result of these provisions in the law, the student loan business has become a reasonably profitable and largely risk-free enterprise for all involved, except the federal government, which now pays $2.6-billion each year to cover interest subsidies and bad debts.

In California, the total known student debt under the guaranteed loan program is at least $3.6 billion. About $750 million in new loans are made annually. The average default rate for all California colleges, universities and proprietary schools is now more than 15%, with some individual institutions ranging over 60%.

But these are merely estimates based on information the state can get from its own state guarantee agency and the federal government. To round out the picture the state believes it needs data from the Minnesota foundation on the student loan business it is doing in California.

Because its information is incomplete, California does not know the answer to such questions as what kind of borrowers are most likely to default. Are students in certain academic majors or certain income brackets, for example, less likely to repay than those in other categories?

California has become aggressive in recent months in attempting to reduce its default rate on all government-backed student loans. Answers to such questions are also necessary for planning purposes if the state is to design education-assistance programs that meet the needs of students without being too costly or duplicative of federal efforts, said Suzanne Ness, a spokesperson for the California Postsecondary Education Commission.

The activities of the nation’s two private student loan guarantee organizations--the Minnesota foundation and the United Student Aid Fund--have so concerned U.S. Sen. Pete Wilson (R-Calif.) that he has introduced a bill that would require an investigation by the Government Accounting Office and demand that all states receive the kind of detailed information about loans that California has requested. Currently, federal law requires that guarantee agencies report only limited information to the federal government, which has not shared it with the states in useful form.

Although Wilson’s proposal has been passed by the Senate in an overall education reauthorization measure, it is not included in a House version of the same bill. A conference committee is expected to begin deliberations later this month to try to resolve differences.