Non-Profit Student Aid Organizations Oppose Retroactive Cuts in 9.5% Student Loan Subsidies

UPDATED: October 7, 2004

Congressional Democrats are being bombarded by opposition from non-profit student aid organizations strongly opposing their calls for “retroactive” cuts in 9.5% subsidies that would hurt students and families.  These non-profit organizations were told years ago by the Clinton administration that the 9.5% subsidies – which they are required to use for borrower benefits – were perfectly legal.

Republicans have offered legislation (H.R. 5186, the Taxpayer-Teacher Protection Act) that would end the 9.5% subsidies prospectively and use the money to support teachers and poor schools WITHOUT making the destructive retroactive cuts called for by Democrats, which would cause significant harm to non-profit student aid providers that are helping students and families pay for college.

Among those non-profit organizations mobilizing in opposition to retroactive cuts like those proposed by Democrats:

• California ’s Chela Education Financing

• Iowa Student Loan

• New Mexico Educational Assistance Foundation

• Rhode Island Student Loan Authority

• South Texas Higher Education Authority

• South Carolina Student Loan Corporation

• Oklahoma Student Loan Authority

• Vermont Student Assistance Corporation

• Montana Higher Education Student Assistance Corporation

Some excerpts from the letters being sent to Congress opposing retroactive 9.5% loan cuts:

CHELA Financial – California ’s largest not-for-profit education loan provider.  “Chela has created unique and industry-leading education finance programs that return SAP funds [special allowance payments] directly to student borrowers in the form of lower interest rates and debt forgiveness.  These ‘Borrower Benefit’ programs have immediate impact and are cost-effective ways to increase education opportunities for those economically stressed families that look to higher education as a springboard to better jobs and better lives … Keeping the legislation prospective will allow Chela to honor commitments to existing borrowers and offer these benefits to new borrowers.”

                                                                                    Doug Dalton

                                                                                    President

Iowa Student Loan.  “Some of the recipients of the 9.5 % floors are State agencies and non-profits like Iowa Student Loan, which run lean organizations in order to maximize the help they provide to students and parents struggling to pay for college. A significant portion of the funding for these programs comes from 9.5% Floor subsidies.  Cuts in these subsidies, especially retroactive cuts, would immediate cause a negative impact to Iowa students and Iowa Student Loan’s ability to offer these programs.” 

                                                                                    Steve McCullough

                                                                                    President and CEO

New Mexico Educational Assistance Foundation (NMEAF).  “As Congress moves through the process of fixing this problem, we ask that it do so very carefully.  Retroactive cuts in these subsidies for non-profit organization such as NMEAF will have a dramatic impact on the students in New Mexico and our ability to offer borrower benefit programs that substantially reduce the cost of a college education for these students.  This is critically important for the students in New Mexico since a large number of these students are first generation college attendees.”

                                                                                    Elwood G. “Woody” Farber

                                                                                    President

Rhode Island Student Loan Authority (RISLA).  “We ask that you carefully consider the various proposals to reduce the floor subsidies.  A reduction in the subsidy, specifically a retroactive cut, could cause a negative impact on Rhode Island Students and the Rhode Island Student Loan Authority’s ability to pay for such programs.”  The Authority plans to spend in the next year several million dollars on programs such as – origination fee reductions, Teaching and Nursing Reward programs, College Planning Center activities, and various on time repayment incentive programs.

                                                                                    Noel F. Simpson

                                                                                    Executive Director

South Texas Higher Education Authority.  “I am writing to voice my support for efforts underway in Congress to make changes to the federal policy governing loans financed by tax-exempt financing.  However, it is critical that any such changes need to be carefully constructed, prospective, and designed to ensure that any savings to the federal government flow to current and future students.  It is absolutely essential to the financial health of the South Texas Higher Education Authority and the programs we offer that no retroactive changes be made to outstanding loans or tax-exempt bonds.  More specifically, the South Texas Higher Education Authority and its administrative servicing agent, COSTEP, serve a population that is 49% minority, with 73% of that minority Hispanic.

“One of the main reasons we are able to offer important programs that lower the cost of student loans is the access we have to limited amounts of tax-exempt debt … If Congress were to retroactively change the terms of the floor loans or the recycling capacity for a particular bond, the underlying economics of its bond financings would be significantly changed and could result in its inability to meet its contractual commitments.”

                                                                                    Patricia Beard

                                                                                    President, COSTEP

Oklahoma Student Loan Authority (OSLA).  “We cast our support for your bill H.R. 5186, the ‘Taxpayer-Teacher Protection Act’ and the changes that it makes in governing student loans financed by certain tax-exempt bonds.  However, it is critical that Congress does not abandon the precedent of making changes to federal law on a prospective basis … A retroactive change would be detrimental.  OSLA offers Exceptional Borrower Benefits on the education loans that we hold and service here in Oklahoma City .  One reason that we can offer these benefits is our ability to issue tax-exempt debt.  The Oklahoma Legislature provides us with a statutory portion of the limited tax-exempt private activity ‘Cap’ available in Oklahoma .  However, since both the State ‘Cap’ amount and our share are a limited resource, we rely on recycling.  This helps us continue offering our borrower benefit programs.”

            James T. Farha                                              Roderick W. Durrell

            President                                                       Vice President

Montana Higher Education Student Assistance Corporation.  “It is imperative, however, that legislation that is enacted be applied prospectively only.  MHESAC has entered into a number of interest rate swaps that are associated to floor loans and floor bonds.  Retroactive elimination of the floor would require MHESAC to terminate its interest rate swaps at a very significant cost.  In today’s market, that cost could exceed $8 million.  These are dollars that otherwise could go to benefit Montana students in the form of borrower benefit programs.”

                                                                                    James A. Stipcich

                                                                                    President

Student Assistance Foundation of Montana

Vermont Student Assistance Corporation.  “I understand that this week the Congress will consider proposals to restrict the 9.5% Floor subsidies in the guaranteed student loan program.  I believe that excesses in the student loan program can and should be addressed and that they can be addressed while doing minimal harm to the Vermont students and families for whom the program was created.  I understand, however, that there are proposals to make immediate retroactive changes in this program.  These proposals would cost Vermont students and their families millions of dollars each year.  On behalf of our students and families, I urge you to reject these retroactive proposals.”

                                                                                    Donald R. Vickers

                                                                                    President/CEO