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Bell Proposes Rules for States Seeking Bonds To Back Loans

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Washington--Secretary of Education Terrel H. Bell has proposed new rules to govern requests from states seeking federal approval to issue tax-exempt bonds to finance student loans.

Secretary Bell has provoked criticism from the Congress and representatives of state higher-education loan programs in recent months for breaking a pattern of routinely approving states' requests for tax-exempt bonds to fund Guaranteed Student Loans. (See Education Week, Jan. 18, 1984.)

The Education Department rejected applications for $1.1 billion in bond issues from four states and delayed its approval of bond issues totaling about $1 billion from 19 states. It approved $466.5 million in bonds for six states.

The proposed regulations, which were printed in the Feb. 10 Federal Register, are apparently designed to help the government save money. "The federal revenue foregone because of the tax-exempt status ... increases the Federal deficit," a preamble to the rules said.

Intent of Congress

The proposed regulations state that Secretary Bell was "following the intent of Congress" that the Education Department "police the amounts of capital raised through tax-exempt offerings to ensure that excessive amounts beyond the reasonable needs of student credit are not being sold."

The Congress passed a measure last summer requiring state loan agencies to investigate other sources for funding guaranteed loans besides bonds that lose tax revenue for the government.

But critics have maintained that Secretary Bell is implementing the law too strictly and that the regulations could limit the amount of loans to needy students.

In recent months, the department has turned down bond requests from agencies in California, Louisiana, Maine, and Utah. Another $1 billion in bond issues is pending from lend-ing agencies in Connecticut, Idaho, Illinois, Indiana, Iowa, Kansas, Massachusetts, Mississippi, Missouri, Montana, Nebraska, North Carolina, North Dakota, Ohio, Rhode Island, South Dakota, Texas, Vermont, and Washington.

Bond issues were approved for agencies in Michigan, Minnesota, South Dakota, Texas, and Virginia and for the New England Loan Marketing Corporation.

Under the proposed regulations, the department would "[limit] the issuance of tax-exempt obligations to instances in which available credit from other sources ... is insufficient to meet reasonable borrower need."

30-Day Process

The proposals would require the state lending authorities to submit plans to the Secretary of Education, who would then have 30 days to approve or disapprove the plans. The 30-day countdown would not begin until the applications were deemed by the federal agency to be complete.

Among other requirements, a plan must not exclude any eligible lender and must not "purchase student loans at a premium or discount exceeding 1 percent of the unpaid principal borrowed plus interest accrued.'' The lending agent also must have an annual audit and cannot receive "tax-exempt obligations in excess of unmet need."

About one-third of guaranteed loans, which are now available to students at 8-percent interest, are financed by state loan programs and the remaining two-thirds are financed by the Student Loan Marketing Association (known as "Sallie Mae").

The public is invited to submit comments or suggestions on the proposed regulations on or before March 12 to Mr. David Bayer, Guaranteed Student Loan Program, Office of Postsecondary Education, U.S. Department of Education, Room 4310, ROB-3, 400 Maryland Ave., S.W., Washington, D.C. 20202.--sr

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