BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 2377
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          CONCURRENCE IN SENATE AMENDMENTS
          AB 2377 (John A. Pérez)
          As Amended  August 20, 2014
          Majority vote
           
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          |ASSEMBLY:  |74-2 |(May 28, 2014)  |SENATE: |29-5 |(August 25,    |
          |           |     |                |        |     |2014)          |
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           Original Committee Reference:    HIGHER ED.  

           SUMMARY  :  Establishes the California Student Loan Refinancing  
          Program (Program) to provide student loan refinancing options to  
          qualified borrowers.  

           The Senate amendments  provide that only a loan determined by the  
          California Educational Facilities Authority (CEFA) to be an  
          educational loan non-dischargeable in bankruptcy shall be a  
          qualified loan eligible for financing under this bill.

           EXISTING LAW  establishes CEFA, housed in the State Treasurer's  
          Office, for the purpose of issuing revenue bonds to 1) assist  
          postsecondary education institutions in the expansion and  
          construction of educational facilities; 2) provide public and  
          private institutions with additional means to assist students in  
          financing cost of attendance; 3) to develop housing on or near  
          institutions; and, to make grants to private institutions to  
          assist students in preparing for higher education.  CEFA is  
          authorized to issue tax-exempt bonds, and therefore may provide  
          more favorable financing than might otherwise be obtainable.   
          The law specifically provides that bonds issued by CEFA shall  
          not be a debt, liability, or claim on the faith and credit or  
          the taxing power of the State of California or any of its  
          political subdivisions.  The full faith and credit of the  
          participating institution is normally pledged to the payment of  
          the bonds.  The CEFA consists of 1) the Director of Finance, 2)  
          the State Controller, 3) the State Treasurer, who serves as  
          chairperson, and 4) two members appointed by the Governor for  
          four year terms, as specified.  

           FISCAL EFFECT  :  According to the Senate Appropriations  
          Committee:

          1)Significant one-time costs (General Fund) to the State  








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            Treasurer's Office to establish and staff the new program.   
            Costs may be recoverable over time through participant fees,  
            to the extent that the program is successful.  

          2)Substantial initial costs to establish a loan loss reserve  
            fund; based on estimates, $10 million would be sufficient to  
            serve 6,000 borrowers.  To the extent that the program is  
            successful, its growth could be self-sustaining over time.

          3)Insuring financial institutions against borrower default of  
            refinanced student loan debt carries risk.  If borrower  
            default is higher than projected, the CEFA could lose a  
            portion of the state's initial investment.

           COMMENTS  :  In the 1980s, the California State Treasurer  
          administered the California Student Loan Authority (CSLA); a  
          student loan program to purchase federally reinsured educational  
          loans from eligible lending institutions by issuing tax-exempt  
          revenue bonds, thereby expanding student access to such low-cost  
          federally reinsured loans.  In 1995, the California Student Loan  
          Authority merged with CEFA, the functions were expanded under  
          CEFA to include direct student lending from proceeds of  
          tax-exempt revenue bonds issued by CEFA.  After the CSLA and  
          CEFA merger, CEFA developed two fixed rate student loan programs  
          for higher education:  Cal Loan Bond Program (needs-based); and,  
          Cal-Edge Bond Program (credit-based).

          According to information provided by the State Treasurer's  
          Office, the minimum loan amount was $2,500 and the maximum loan  
          amount was $50,000 (undergrad) and $75,000 (graduate). Most  
          loans were between $5,000 to $10,000.  Some individuals took out  
          multiple loans.  The last loan made was about 10 years ago. In  
          October of 2013:  outstanding bond amounts totaled $5.1 million;  
          1,404 loans were outstanding, totaling $12.1 million; 875 loans  
          were in default, totaling $10.9 million; and, average interest  
          rates ranged from 7.5% to 8.4%.  Earlier this year, CEFA made  
          the decision to sell the remaining debt and begin to wind-down  
          the program.

          According to the author, "While the Legislature has continued to  
          fight for college affordability on the front end, very little  
          has been done to assist the students that have already incurred  
          loan debt.  College graduates must begin the process of  
          servicing their student loan debt very shortly after they  
          graduate; however, depending on the type of loans they have,  








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          their options for reducing debt repayment or creating other  
          repayment pathways tied to their employment circumstances are  
          limited."  The author notes that student loan refinancing can  
          have a huge impact on a borrower, potentially saving thousands  
          in interest over the life of the loan(s).  This bill provides  
          CEFA authority for loan consolidation, interest rate buy-down,  
          debt restructuring, establishing a loan loss reserve account,  
          and alignment with various federal student loan alternative  
          repayment programs.


           Analysis Prepared by  :    Laura Metune / HIGHER ED. / (916)  
          319-3960 


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