BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Kevin de León, Chair
AB 2377 (J. Perez) - California Student Loan Refinancing Program
Amended: May 23, 2014 Policy Vote: Education 5-1
Urgency: No Mandate: No
Hearing Date: August 14, 2014
Consultant: Jacqueline Wong-Hernandez
SUSPENSE FILE. AS PROPOSED TO BE AMENDED.
Bill Summary: AB 2377 establishes the California Student Loan
Refinancing Program (CSLRP), to be administered by the
California Educational Facilities Authority (CEFA), to assist in
the refinance of private student loan debt at favorable rates,
and establishes eligibility requirements for the program.
Fiscal Impact (as approved on August 14, 2014):
CSLRP: Significant one-time costs (General Fund) to the
State Treasurer's Office (STO) to establish and staff the
new program. Costs may be recoverable over time through
participant fees, to the extent that the program is
successful.
Loan Loss Reserve: Substantial initial costs to establish a
loan loss reserve fund. The program's ability to expand will
partially depend on the amount of cash available to
establish the fund; the STO has indicated that $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.
Risk: 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.
Background: Existing law establishes the CEFA within the STO to
administer programs that provide tax-exempt, low-cost financing
to private, non-profit higher educational facilities. Existing
law specifically outlines the following purposes of the CEFA:
a) To provide private institutions of higher education
within the state an additional means by which to finance
and refinance existing higher education facilities.
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b) To provide private and public institutions of higher
education with an additional means to assist students in
financing their costs of attendance.
c) To develop student, faculty and staff housing on or near
institutions of higher education.
d) To make grants to private institutions of higher
education to assist students in preparation for and
entrance to higher education.
CEFA also has various authorities relative to student loans
including the authority to finance or purchase student loans,
hold or invest in student loans, create pools of student loans,
sell interest bearing bonds backed by pools of student loans,
and the ability to contract or otherwise provide for
distribution, processing, origination, purchase, sale,
servicing, securing, and collection of student loans, payment of
fees, charges, and administrative expenses therewith.
(Education Code §94100-94213)
Existing law authorizes two similar programs under other
divisions of the STO. These include the CalCAP, administered by
the California Pollution Control Financing Authority and the
PACE Loss Reserve Program, administered by the California
Alternative Energy and Advanced Transportation Financing
Authority.
Proposed Law: This bill establishes the CSLRP and outlines its
operation. Specifically, this bill:
1) Authorizes the CEFA to contract with any financial
institution, including a credit union, to the extent
participation complies with specified California Credit
Union Law, for purpose of participation in the program.
2) Requires the CEFA to establish a loss reserve account for
each financial institution with which it contracts.
3) Establishes a CEFA notification process for a financial
institution seeking to enroll a qualified loan in the
program.
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4) Requires the authority to establish procedures under which
a financial institution may submit claims for reimbursement
for losses incurred as a result of qualified loan defaults
and outlines the conditions under which a claim for
reimbursement may be filed.
5) Requires the CEFA to annually submit a report describing
the program's financial condition to the Governor and the
Legislature.
6) Authorizes the CEFA to enter into agreements to provide
assistance in carrying out the program, including
origination and servicing of qualified loans.
7) Authorizes the CEFA to facilitate the development of a
secondary market for a qualified loan program, and outlines
specific actions that may be taken for this purpose.
8) Authorizes the adoption of emergency regulations for
purposes of implementing the bill's provisions.
9) Defines various terms for purposes of the bill including
the following:
a) A "qualified borrower" is a resident of
California who has completed a bachelor's degree, is
employed in a public service program or by a
nonprofit, has the ability to repay, as determined by
CEFA, and that meets other criteria as established by
the CEFA and the financial institution
b) A "qualified loan" is a loan or portion
of a loan made by the financial institution to a
"qualified borrower" to refinance a private student
loan.
c) A "loan loss reserve" is an account
established and maintained by the CEFA for purposes of
depositing fees paid by financial institutions and
qualified borrowers, and state, federal, or other
sources of contribution, for purposes of covering any
losses on enrolled qualified loans sustained by a
participating financial institution.
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Staff Comments: The intent of this bill is to create a
refinancing program, using a loan loss reserve fund, under which
qualifying individuals with outstanding student loans could
refinance their loans at more favorable terms through private
financial institutions, and CEFA would in turn place a portion
of the loan amounts into a reserve fund to cover defaults, thus
reducing the risk to the financial institutions.
Such a program would need an initial infusion of state funds to
both set up a loan loss reserve fund, and to dedicate staff to
creating this new program. The STO has opined that $10 million
would be an appropriate amount to establish the loan loss
reserve fund. Before the program could begin accepting clients,
the CEFA would need to adopt the emergency regulations, develop
the contracts, approve the qualification guidelines, establish
the claims procedures, and advertise its existence to financial
institutions. While CEFA's administrative costs may be covered
by transaction fees to program participants eventually, these
activities will incur costs immediately, whether or not the
program ever brings in fee revenue. The bill language gives
broad authority for the CEFA to administer the program as it
sees fit, and the costs and potential revenue will depend on
CEFA's ability to design and implement a program that accurately
predicts rates of default and claim amounts relative to the fees
charged to participants.
As with any insurance program, insuring financial institutions
against borrower default of refinanced student loan debt carries
risk. Generally, student loans are "safer" than other types of
loans. Staff notes, however, that it is unclear whether the
refinanced loans the CSLRP would insure would still be
considered "student loans" in bankruptcy. Under existing federal
law, it is very difficult to discharge student loans in
bankruptcy. Consumer debt (i.e. other types of loans), however,
are fully dischargeable. Refinancing a student loan through a
bank is functionally the issuing of a new loan by an entity that
paid off the initial student loan, and it is unclear how a
bankruptcy court would treat the loan. The author may wish to
add language specifying that CSLRP loans shall be treated as
student loans.
Committee Amendments would limit the CSLRP to insuring
refinanced loans that are still considered to be "student loans"
under federal law.
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