3 states lose loan fund appeal

October 10, 1990|By Melody Simmons | Melody Simmons,Evening Sun Staff

The U.S. Supreme Court has rejected arguments made by education agencies in Maryland and other states 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, and officials are worried that it might also apply to additional reserve funds.

The high court yesterday rejected the states' appeal of a ruling that a federal law requiring them to return 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 yesterday'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 guarantees $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.

In 1965, Congress established the loan program, which allows private lenders to give federally subsidized loans to students. Participating states must guarantee that unpaid principal will be repaid if a student defaults.

Congress amended the program in 1987 and gave 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 for a nationwide fund to help reimburse lenders.

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.

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