By James Jefferson
Arkansas News Bureau

LITTLE ROCK — A sweeping federal overhaul of higher education funding signed into law today puts the squeeze on a state student loan agency just emerging from a drought in business caused by the credit crunch two years ago.

The Arkansas Student Loan Authority, which has been funding student loans for more than 30 years, will be reduced to servicing federally funded loans under the bill.

But even that function is uncertain, depending on how much of a fee the government pays for the service, ASLA Executive Director Tony Williams said.

Also to be considered, Williams said, is the cost of complying with federal contracting requirements for building security, information technology system security and ongoing reports — costs he said will have to be paid out of the loan servicing fee.

“At this point, we do not know if we will be participating or not,” Williams said. “If the pricing is not favorable, we will continue to administer the $600 million in loans we have on our books. As they pay down, it would result in layoffs if we cannot participate in direct loan servicing.”

The agency currently has 18 employees.

In April 2008, the nonprofit state entity that has traditionally received all its funding from the sale of bonds backed by student loans faced the possibility of not issuing any loans that fall. Investors spooked by credit problems that began in the subprime mortgage market were unwilling to buy bonds from ASLA or lenders nationwide even though they are 97 percent insured by the federal government.

The agency managed to stay afloat, buoyed by an $80 million line of credit from the state, and is on track to repay the line of credit on schedule in September.

However, Williams said Tuesday that ASLA faces a new challenge from the new higher education funding overhaul.

The measure has provisions the agency supported. In addition to doubling Pell grants, it eases the loan repayment structure for graduates and includes a forgiveness program for teachers, nurses and military personnel.

But interest earnings from student loans also will be used to help fund a monumental expansion of the nation’s health care system, Williams said.

The education bill maintains interest rates on student loans at 6.8 percent. Under federal rules in place since 2006, the agency has retained 1.5 percent-2 percent and rebated the rest to the federal government. At least part of that federal share will now be used to help fund the health care overhaul, Williams said.

He contended the rate was inflated to begin with and remains so in the new law.

“If we didn’t have to rebate the majority of the interest back to the government, we could charge 3 percent (interest on student loans), Williams said. “It would cover our cost of funds, the interest we pay bond holders of the state, and all of our operating expenses.”

The Obama administration maintains the new law will save the nation $68 billion in funding that otherwise would have been spent on what it calls “the middle men” — institutions such as ASLA and banks that have managed the loans.

“We know that there’s value in having local service. The colleges and the students value the local service,” Williams said.

Matt DeCample, spokesman for Gov. Mike Beebe, said the administration has not seen any analysis of the new law from the student loan agency and would be talking with the agency in the coming weeks to determine how to proceed.

“The administration’s top priority is going to be ensuring that Arkansas students are still able to access the loans they need to attend and complete college,” the governor’s spokesman said.