Utah has joined four other states in a lawsuit that says the U.S. Education Department illegally grabbed cash reserves in higher education's student loan program.
Utah, Colorado, Montana, New Mexico and North Dakota have filed suit in U.S. District Court in Denver. The lawsuit says a 1987 federal law designed to help cut the federal budget deficit is unconstitutional and a breach of contract. The law authorizes the U.S. education secretary to recover from the states the federal advances and "excess" cash reserves in the student loan program.In December 1987, Congress passed legislation requiring the secretary of education to recover from the states $75 million in federal advances in 1988, $35 million in federal advances in 1989 and $250 million in "excess reserves."
For years, the Utah Higher Education Assistance Authority, the state agency established by the State Board of Regents to manage the student loan programs and guarantee loan repayment, has been accumulating cash reserves.
UHEAA willingly returned more than $1.2 million, the amount that the federal government advanced to start up the student loan programs. But UHEAA disputed the feds' claim to an additional $864,500 that the Education Department declared "excess reserves."
UHEAA officials have said that the reserves were built upon federal guidelines, and it is on their strength that lenders are willing to make student loans.
The Education Department did not accept the UHEAA's refusal. In December and November, it withheld repayment to UHEAA on defaulted student loans until the amount reached the $865,000 in question, said Richard Davis, assistant higher education commissioner for student loan finance.
If a student defaults on a loan, UHEAA repays the lender and is then reimbursed by the federal government for the amount, Davis explained.
Michael Smith of the Utah attorney general's office told a subcommittee of the State Board of Regents Friday he thinks the multistate lawsuit will be successful, although it may take a year to be settled.
He said that beside those involved in the Utah lawsuit, seven other states sued the federal government over the same issue last year. In Ohio, a federal judge recently ruled that the law was unconstitutional, violated contract rights and that Ohio shouldn't be required to return $26 million in "excess reserves," he reported.
Smith said the federal government has until Feb. 20 to file a response to the Utah lawsuit.