The U.S. Department of Education has tapped a Minnesota firm to take over California's student-loan guaranty business at the end of October, federal officials said Friday.
The decision officially ends the state's three-year saga of trying to sell EdFund, the nonprofit student-loan guaranty arm that had long generated cash for Cal Grants and tensions with its parent agency, the California Student Aid Commission...
Under the decision, Educational Credit Management Corp., based in Oakdale, Minn., will contract with EdFund for nine to 12 months to service a $38 billion portfolio of outstanding student loans. Thereafter, ECMC plans to hire 200 employees of its own to manage the portfolio, federal officials said...
California will retain more than $100 million to use in the 2010-11 state budget for Cal Grants, funds that lawmakers are already counting on. Most of that money was previously earned by EdFund and is in reserve. EdFund has raised more than $250 million total for Cal Grants in the past.
But the state will not be able to "sell" EdFund, as Gov. Arnold Schwarzenegger and state lawmakers told the Department of Finance to do in 2007 as a budget solution. When the governor originally proposed the idea, he suggested EdFund could sell for up to $1 billion. The failure of such transactions has contributed to the state's deficit woes.
The state formed EdFund in 1997 as a nonprofit public benefit corporation. The federal government's official guaranty relationship is with CSAC, which relies on EdFund to operate the student-loan portfolio. CSAC and EdFund feuded for many years, particularly over complaints that EdFund operated too much like a private firm by spending on bonuses and perks. CSAC officials were unavailable for comment Friday.
For years, the federal government used guarantors such as EdFund to spur private lending to college students. When students default, EdFund repays banks and gets reimbursed nearly in full by the federal government. EdFund earns most of its revenues by collecting from students in default.
The guaranty business is now destined to shrink because the federal government has eliminated private banks from its major student loan program, starting in July. Agencies like ECMC and EdFund no longer have a steady stream of new student loans to guarantee.
EdFund services roughly half the student loans previously taken out at California schools, including most of the California State University system. It serves schools in all 50 states; two-thirds of its borrowers are outside California.
He who pays the piper calls the tune.