U.S. Orders State Student Aid Agency to Repay $62 Million : Finance: Firing of top managers is demanded by federal officials, who say 21,427 defaulted loans were mishandled. Commission admits to some problems but says less than $1 million is owed.

Federal education officials have demanded that the California Student Aid Commission repay $62.6 million worth of defaulted student loans and fire its top administrators because of “unprecedented” snafus in how it handled student accounts during the past several years.

In a letter the commission received Aug. 19, the U.S. Department of Education demanded refund of the loans plus interest after concluding that the obscure California agency, which guarantees billions of dollars in student debt, mishandled 21,427 bad loans because of computer problems or unwillingness to repay lenders during the state’s 1992 budget crisis.

The department has also taken the unusual step of ordering the 15-member commission to reinvent itself by junking its $14-million computer system and replacing Executive Director Sam Kipp III and his top managers. Federal officials also want unusual power to name the agency’s new management team.

If the commission refuses to go along, the federal government “will have no choice but to terminate” its relationship with the agency and find someone else through which to operate the guaranteed federal student loan program in California, which accounts for about 10% of all the loans given out, said David A. Longanecker, assistant U.S. secretary for post-secondary education.

Meanwhile, Assembly Speaker Willie Brown (D-San Francisco) may render all of that moot. An aide to the powerful legislative leader said Brown called Kipp into his office Tuesday and said he was “looking seriously at abolishing the commission because of the $62-million fine that’s been imposed by the federal government.”

The aide, who asked not to be identified, said legislative amendments to eliminate the commission are being drafted by Brown’s staff and “very likely” could be passed by the time the Legislature is scheduled to adjourn Wednesday.

Although they acknowledge that there have been problems processing student loans, commission members say they owe the U.S. Department of Education less than $1 million and they called a closed-door meeting for Sept. 2 to discuss the possibility of suing the federal government, said commission Chairman Mike Carona.

Carona said he and another commission member met in Dallas on Aug. 8 with federal education officials to iron out an agreement for repayment and restructuring the agency. But there was no agreement because a “major sticking point was that the Department of Education wanted to run the Student Aid Commission by telling us who we could hire and who we could fire,” he said. “It’s a states rights issue.”

The commission serves as guarantor for the federal student loans, which are made directly to students by private institutions but are turned over to the agency if there is a default. The agency, which is responsible for the bookkeeping, steps in to pay off the bank and then requests reimbursement from the federal government. Last year, it handled 451,000 loans worth $1.7 billion, a spokesman said.

The commission must report defaults within 90 days, but the federal government said it missed that deadline and failed to repay lenders on time for more than 21,400 loans between 1990 and 1993--a transgression that made the loans ineligible for reimbursement.

In some cases, federal officials say, the commission missed the deadlines because of the state’s 1992 fiscal crisis, during which California was without a budget for 63 days and most workers had to be paid with warrants. But because the reimbursements required federal--not state--money, there was no excuse for the delay, they argued.

In other cases, the agency’s conversion to the computer system, done mainly in 1993, was blamed for massive foul-ups in tracking the loans. Longanecker also said his office found that the agency, which is supposed to act as a check on lenders, allowed “lenders to go in and override their system at will.

“I’d love to have that kind of relationship with my bank,” he said.

Carona said the commission itself informed the Department of Education about the problems with the computer system, called the Financial Aid Processing System. In June, the commission received an internal audit recommending that the agency replace the system because it was “muddled, convoluted and . . . archaic.”

Carona also said the agency was prevented by the budget crisis from repaying on defaulted loans because all federal funds are routed through the state general fund, which was frozen during the 63 days.

Although Carona said the agency has enough in its reserves to pay for the $62-million fine, it is only one of several potential liabilities. State and federal officials are conducting unrelated audits that could bring the total to more than $200 million, he said.

Longanecker said the $62-million dispute would not imperil loans for students, but one financial aid counselor said the issue has colleges and lenders “in turmoil” because of the uncertainty, especially at the peak of the season as students come back to school.

“One of the biggest sources of anxiety . . . is not knowing how it may affect the program,” said Patricia Hurly, president of the California Community College Financial Aid Assn. “Until that information is available, we’re all making big guesses.”