The Administration proposes to sell California's student loan guarantee agency-EdFund- which would generate approximately $1 billion in one-time revenue to the state. In 1996, the Legislature authorized the California Student Aid Commission to establish a non-profit public benefit corporation to provide student loan guaranty services under the Federal Family Education Loan (FFEL) Program. Subsequently, EdFund was created in 1997 as a performance-based organization that was exempt from certain state employment and procurement requirements, which enabled it to compete with other guarantor organizations throughout the country. EdFund guarantees not only California student loans, but loans to students in other states as well. In fact, over half of all loans guaranteed by EdFund are held by non-California students. EdFund is the second largest guarantor in the nation and currently maintains a loan portfolio in excess of $27 billion.
EdFund is an inherently valuable asset because the student loan guarantee business is a fundamentally attractive financial venture. The student loan guarantee business is not a core mission or competency of government. Recognition of this fact led to spinning off the loan guarantee business from a state government operation to a quasi-governmental, private non-profit that is now EdFund. However, selling this non-governmental entity to a private company could produce a significant one-time financial benefit to the state without adversely affecting students. There are many student loan guarantee firms throughout the country that compete vigorously with each other. Nearly all of them are private firms, not governmental entities. Potential buyers of EdFund will be attracted to the opportunity of acquiring EdFund's substantial loan guarantee portfolio and brand name. In addition, potential buyers may be attracted by the indications of recent analyses that there could be significant opportunities to increase the current efficiency of EdFund and diversify into other compatible lines of business such as loan servicing and collections, thereby generating higher revenues and profit margins. The May Revision assumes that EdFund would sell for at least $1 billion. However, that gross revenue to the state would be offset by the loss of some operating revenue currently provided by EdFund to fund certain student aid activities. Consequently, the May Revision shifts this lost revenue stream of $20.3 million a year to the General Fund, resulting in a net one-time benefit to the state of approximately $980 million.
This proposal would not adversely affect students' access to loans or the interest rates they pay for loans (which are set by the federal government). EdFund does not set loan interest rates or charge students fees. Its revenues come primarily from the banks that they do business with and the federal government.
