States Eyeing Novel Ways to Fund Higher Ed.

Selling off student loans, leasing lotteries are some of the politically risky ideas.

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Responding to calls that higher education is in crisis and must be fixed, governors and lawmakers across the country are exploring creative—and politically risky—ways to sink more money into their colleges, universities, and student financial aid during the 2007 legislative sessions.

In Indiana, Republican Gov. Mitch Daniels wants to lease his state’s lottery to a private contractor, which could bring in a whopping $1 billion one-time payment. The money would fund new merit-based scholarships for college-bound students and endowed teaching spots for professors.

Student-loan profits are being eyed in Missouri, where Gov. Matt Blunt, a Republican, is proposing to use $350 million from the state’s student-loan portfolio to finance university building projects, particularly those involving science and technology.

And in Illinois, the state’s Student Assistance Commission already is in the process of selling $650 million in student loans to other loan companies, which will pay for Gov. Rod R. Blagojevich’s scholarship program for middle-income families who don’t qualify for need-based aid. More loan sales could be on the horizon.

Separately, Illinois’ Democratic governor also is considering leasing his state’s lottery and using the money for K-12 education, although no revenue estimates are available yet.

Such ideas, which would mine previously untouched pots of money, already are running into political resistance and criticism that the proposals are short-term gimmicks that don’t address fundamental problems in the quality and affordability of college.

“Our higher education has suffered greatly in the last four years, but I don’t think a knee-jerk reaction or short-term solutions get us to where we want to be,” said Missouri Rep. Clint Zweifel, a Democrat who opposes Gov. Blunt’s student-loan proposal. “It’s bad policy.”

The Denver-based National Conference of State Legislatures has deemed higher education funding and reform one of the top 10 issues facing lawmakers during the 2007 legislative sessions—a list that notably does not include K-12 education. In November 2006, the NCSL’s Blue Ribbon Commission on Higher Education unveiled recommendations to address what it deemed a higher education crisis, including suggestions that states devise their own strategic higher education plans and rethink student financial aid. ("U.S. Eyes Accreditation in Higher Ed. Push," Dec. 6, 2006.)

Focus on Money

Some state policymakers seem to be taking the NCSL recommendations seriously.

New Sources of Money for State Colleges, Universities

States are considering creative ways to increase higher education funding. Among them:

Initiative: Republican Gov. Mitch Daniels wants to lease the Hoosier Lottery to a private company.
Expected revenue: $1 billion
Use: Sixty percent of that money would pay for about 1,700 scholarships a year, at $20,000 each for four-year institutions and $5,000 for two-year colleges, based on merit, for students who agree to work in the state for three years after college graduation. The remaining 40 percent of the lottery proceeds would fund an endowment that would pay for scholars to relocate to Indiana to teach in a public university.
Status: Needs legislative approval

Initiative: Republican Gov. Matt Blunt wants to use $350 million from his state’s student-loan holdings for building projects; in return, the student-loan agency would receive bonding authority to underwrite new loans. The agency would sell student loans of non-Missouri residents to another company to pay off the bonds.
Expected revenue: $350 million
Use: Academic buildings, other capital projects
Status: Seeking legislative approval

Initiative: The state’s Student Assistance Commission is selling $650 million in student loans to another company.
Expected revenue: $34 million
Use: The money will finance Democratic Gov. Rod R. Blagojevich’s program that provides $500 scholarships for 70,000 middle-income students who don’t qualify for need-based aid.
Status: Approved by the legislature last year; the student-loan agency is expecting to complete the sell-off this week.

“We know the economy depends on jobs and higher education,” said Texas Rep. Geanie W. Morrison, the Republican chairwoman of her chamber’s higher education committee and a member of the NCSL blue-ribbon commission, in a conference call after the report was unveiled. She said that during the 2007 session, the Texas legislature will consider how to increase the state’s college-attendance rate, especially among Texas’ burgeoning Hispanic community.

But some policymakers are focusing first on money.

Perhaps the most radical plan is Gov. Daniels’ idea for leasing the Indiana lottery—a contracting arrangement that hasn’t been tried elsewhere in the nation and one that would require legislative approval.

Aides in the governor’s office estimate a company might pay up to $1 billion for the right to run, and make money from, the Hoosier Lottery. Under Gov. Daniels’ plan, 60 percent of the upfront money from such a contract, or about $600 million, would be put into an endowment, and the interest would fund merit-based scholarships worth $20,000 per student for a four-year institution, or $5,000 for a two-year college. Students could use the scholarship at any Indiana public or private institution.

But there’s a big catch: In an effort to prevent an exodus of Indiana students to other states, the plan would require that students work in the state for three years after they graduate or pay back the money.

The remaining 40 percent of the money, or about $400 million, would pay for start-up costs and salaries for what the governor’s office called “renowned” researchers and scholars who relocate to an Indiana public college or university.

“If we’re going to have a successful economy, it’s going to be driven by smart people. The governor really liked the idea of going after the best and the brightest,” said Neil Pickett, Gov. Daniels’ senior policy director. Mr. Pickett acknowledged that the idea of using the lottery is controversial, but said, “I don’t think there are that many ways to come up with that kind of money at no cost to taxpayers.”

Some of the opposition comes from Democrats and others who object to leasing, or “privatizing,” a state asset like the Hoosier Lottery. Others questioned whether higher education funding should come before K-12 funding, and whether leasing the lottery is just a ruse to expand gambling “under the guise of making college more accessible and affordable,” according to written statements made by Indiana Democratic legislative leaders.

In Missouri, Gov. Blunt’s plan to use student loans to finance university facilities projects, first unveiled in early 2006, has drawn a bipartisan group of opponents. Rep. Zweifel said many Democrats and Republicans question whether the plan will drive up borrowing costs for students, whether the agency can afford to give up the money, and whether funding construction should be part of the mission of an agency that seeks to keep college costs down.

Missouri Details

His complex proposal calls for the state’s student-loan agency to transfer $350 million out of its $5.4 billion in loan holdings to a separate finance board, which would pass on most of the money to colleges and universities for building projects. The plan would fund a variety of projects, including an $11 million engineering and aerospace building at the University of Missouri at Rolla and an $85 million health sciences center at the university’s Columbia campus.

In exchange for the money, the student-loan agency would receive more than $1 billion in bonding authority so it can underwrite new student loans. The agency would then sell other student loans to pay off those bonds—a precedent-setting use of student loans, industry officials have said.

A spokeswoman for Gov. Blunt, Jessica Robinson, emphasized that no student loans from Missouri residents or those going to school in the state would be sold, only loans of nonresidents. In addition, she said, the terms and interest rates of the sold loans would remain the same—just as when a home mortgage is sold.

“This creates an opportunity that’s a win for students and a win for the universities and a win for the state,” Ms. Robinson said. “These are projects that had long been delayed and are much needed.”

Far less controversy surrounded a different, simpler student-loan effort in Illinois, where Gov. Blagojevich won legislative approval last year to sell part of his state’s $4 billion portfolio to pay for 70,000 scholarships worth $500 each for middle-income students who don’t qualify for other state and need-based financial aid.

The sale of the $650 million in student loans is expected to raise $34 million for the scholarships.

Vol. 26, Issue 19, Pages 16, 20

Published in Print: January 17, 2007, as States Eyeing Novel Ways to Fund Higher Ed.
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