By Shannon Rasberry
Article Date: August 10, 2010
Three years ago, California announced its intent to sell a $38 billion portfolio of student loans managed by Rancho Cordova–based EdFund, a guarantor of federal student loans made by private banks — a sale that Gov. Arnold Schwarzenegger’s administration had hoped would raise $1 billion towards the state’s $19 billion deficit.
The problem was, and is, that California doesn’t own the student loan portfolio — the federal government does. Yet as recently as July, finance officials for Schwarzenegger told state lawmakers that California was poised to sell EdFund “in a month or two,” despite a warning from the U.S. Department of Education in May that the Department would reject “any transfer of guaranty agency responsibilities in California arranged under the state’s current process” (“U.S. Vows to Block California’s Sale of EdFund,” The Sacramento Bee, July 31, 2010).
In response to California’s attempted sale of federal property — which culminated in the execution of a confidential bid process earlier this year — the Education Department has not only vowed to block the sale but has released plans to close EdFund by the end of October and choose a replacement guarantor itself.
Other states have collaborated with the federal government in the past to transfer guaranties of federal college loans, but the auctioning of guaranty transfer rights, as was California’s plan, is unprecedented. According to the Education Department, student loan guaranty transfers are supposed to be conducted “based on the needs of borrowers, institutions, and the federal fiscal interest,” not for the purposes of offsetting state deficits.
EdFund’s value fell sharply due to the recession and to the federal government’s dismantling earlier this year of the Federal Family Education Loan Program (FFELP), a third-party student loan program by which banks and other private lenders issued federal parent and student loans to borrowers on behalf of the government. In place of the FFEL program, the Department of Education has begun issuing all federal education loans directly to borrowers, cutting out the middleman lenders as well as many servicers and guarantors. As a result, EdFund was forced to start originating new non-federal, private student loans to make up for lost revenue.
Even so, EdFund still services about half the federal student loans previously taken out at California schools, earning fees on those loans, and its closure would mean an end to tens of millions of dollars in annual contributions to Cal Grants, a state system of financial aid that helps to pay tuition for low-income California residents attending a California school.
In the event EdFund is closed, state lawmakers would have to come up with the money elsewhere to fund Cal Grants or else face limiting students’ access to the financial aid program.
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