Report 2005-120 Summary - April 2006

California Student Aid Commission

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Changes in the Federal Family Education Loan Program, Questionable Decisions, and Inadequate Oversight Raise Doubts About the Financial Stability of the Student Loan Program

HIGHLIGHTS

Our review of the California Student Aid Commission (Student Aid) and EDFUND's administration of the Federal Family Education Loan (FFEL) Program revealed the following:

RESULTS IN BRIEF

The California Student Aid Commission (Student Aid) administers state and federal financial aid programs for students attending universities, colleges, and vocational schools in California and throughout the nation. In fiscal year 2004-05, it awarded $720 million in state grants to more than 240,000 students. During federal fiscal year 2005, it guaranteed new loans totaling more than $6.5 billion under the Federal Family Education Loan (FFEL) Program.1 EDFUND, a nonprofit entity incorporated in 1997 as Student Aid's auxiliary organization, provides operation and administrative services to Student Aid for its participation in the FFEL Program. One of Student Aid's major responsibilities is to oversee EDFUND's operation of the FFEL Program.

Student Aid's FFEL Program lost about $8.3 million in federal fiscal year 2005, and it may barely break even in federal fiscal year 2006. It is presented with a number of challenges that could severely impair its operations and put the State's FFEL Program and its ability to supplement Student Aid's other services and programs at risk.

First, changes in federal laws governing the FFEL Program raise doubts that the State will be able to sustain the program. Student Aid must begin charging borrowers a fee in October 2006. This fee could make it less competitive and reduce the revenues it earns under the FFEL Program because other guaranty agencies will not be charging the fee. EDFUND officials indicated that, had the Legislature not appropriated $197.5 million from the Student Loan Operating Fund (Operating Fund) to support the Cal Grant program, there would have been more funds available to postpone charging the default fee beyond October 1, 2006. Additionally, EDFUND has relied too heavily on defaulted loan consolidations as its main source of revenue, placing the State in a possible position to be affected more severely by federal changes than other guaranty agencies.

Second, ongoing tensions between Student Aid and EDFUND have been costly. The general lack of cooperation, as well as turnover in EDFUND leadership, has hampered Student Aid's ability to renegotiate a revenue agreement with the U.S. Department of Education (Education). At least $24 million more may have been generated in federal fiscal year 2005 if the agreement had been finalized. This same lack of cooperation has delayed attempts to expand and diversify EDFUND's financial services and possibly generate additional revenue that could have been used for California students. Ultimately, if the two entities are unable to resolve their fundamental differences and if EDFUND is unable to demonstrate that it can generate an operating surplus that is sufficient to sustain the FFEL Program and support Student Aid's other services and programs, in our opinion there is little reason to believe that the State benefits from having an auxiliary to assist in the administration of the FFEL Program.

Student Aid has maintained poor oversight over EDFUND as well. It approved sizable bonuses for EDFUND executive staff even when the FFEL Program had an operating deficit, and its policy for setting executive salaries is inconsistent with federal regulations. It also has not ensured that EDFUND travel and business expense policies are fiscally conservative, which results in less funding available for Student Aid to fulfill its mission. EDFUND has in some cases paid more for meals and lodging than its own policies allowed, and it has sponsored costly events for employees and their families. Finally, Student Aid does not independently verify reports received from EDFUND that are used to make policy decisions.

RECOMMENDATIONS

The Legislature should do the following:

To ensure that it maximizes the amount of funds available to fulfill its mission and to administer the FFEL Program effectively, Student Aid should:

AGENCY COMMENTS

Student Aid generally agrees with our recommendations and some of our conclusions. However, it does not agree with other conclusions. For example, Student Aid disagrees with our conclusion that its ability to generate sufficient revenues to justify its continued status as a guaranty agency may be in jeopardy because of federal changes governing the FFEL Program. Student Aid also disagrees with our conclusion that it cannot determine what, if any, impact its tactics for minimizing the effect of the federal changes will have on its ability to remain competitive in the student loan guaranty market.

1EDFUND's fiscal year coincides with the federal government's fiscal year, which is October 1 through September 30. Student Aid's fiscal year coincides with the State's fiscal year, which is July 1 through June 30.