The Supreme Court today rejected an appeal from education agencies in Maryland and other states, which had argued that they should not be required to return to the federal government millions of dollars of their college loan programs' reserve funds.
In Maryland, the ruling applies to $10.8 million in reserves from the Maryland Higher Education Loan Corporation.
The court, without comment, left intact a ruling that a federal law requiring return of the reserve funds to the federal government did not violate property or contractual rights of state agencies that help run the program in Maryland, North Carolina and South Carolina.
The deputy director of the Maryland Higher Education Loan Corporation, David Manning, said news of today's decision caused concern that additional reserve funds could also be tapped.
"We felt it was unconstitutional -- we felt the reserves were assets of the [state loan] corporation and not money available for the federal government to use as they wish," Manning said. "We basically lost about $11 million of our reserve funds because we were frugal. They said we were too fat and happy."
Manning said the MHELC, the state agency that is the guarantor of $860 million in Maryland student loans, remains healthy despite the substantial loss of its reserve fund, which was depleted by the Department of Education in 1988 and 1989. The current reserve fund holds $18 million, he said.
Manning said the the $10.8 million that Maryland returned to the federal government went into the federal budget.
"And looking at that, it may have lasted two or three minutes," he said.
Congress established the loan program in 1965. Federally subsidized loans from private lenders are provided to students. Participating states must guarantee unpaid principal will be repaid if a student defaults.
Congress amended the program in 1987, giving the Department of Education new power to recover excess reserves from state funds used to guarantee the loans. The department wanted to collect $250 million to be placed into a nationwide fund to help reimburse lenders, Manning said.
The department ordered South Carolina to pay $2.7 million; Maryland, $10.8 million; and North Carolina, $2.6 million from their reserves.
The states objected, saying the new law violated their rights by seizing property without just compensation. They also said they had vested contractual rights that were denied by the amended program.
The U.S. 4th Circuit Court of Appeals ruled against the states in March.
The appeals court said "the excess reserve funds are not private property within the meaning" of the Constitution. "The reserve funds are generated solely within the framework of a federal social welfare program."
Manning said the MHELC processes about 60,000 student loan applications annually and has guaranteed loans for 500,000 state college students. The corporation is funded through investment income, a 2 percent insurance surcharge from each student loan and federal sources.
"Financially, we are going to be in business," Manning said. "If things don't change, there will be no problem. But if unemployment goes up and more students default, who knows?"
Complete federal control over the use of the funds also means that no constitutionally protected contract rights are at stake, the appeals court said.