Submitted by: John L. Davis, Vice President for Finance and Treasurer

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1 School as Lender Program Authorization for the Use of University Funds as Part of the School as Lender Program and for a Line of Credit to Periodically Fund the Program Recommendation The Administration requests that the Board of Governors authorize the President or his Designee to lend University funds directly to students as part of the Federal School as Lender Program (the SAL Program). It is also recommended that the Board adopt the attached resolution authorizing the President and/or the Treasurer to negotiate and execute documents for the University to establish a Line of Credit as a financing mechanism for the periodic funding of the loans generated by the SAL Program. Background and Program Description In order to provide students with financial assistance in the form of loans, the University utilizes Federal Stafford Loans by participating in the United States Department of Education Federal Direct Loan Program (FDLP) and the Federal Family Education Loan Program (FFELP). These existing programs are conducted in a manner whereby the University acts as an agent for other organizations that are actually issuing the loans, and the University utilizes their monies to fund these student loans. The University will continue to use these existing loan programs for undergraduate and School of Medicine students. However, with the approval of the above recommendations, the University will also participate in the SAL Program, effective July 1, The SAL Program allows the University to directly issue student loans to graduate and professional students with its own funds. The University will include all new graduate and professional students (except the School of Medicine) in the SAL Program, and over a number of years, migrate all other graduate and professional students (again, excluding the School of Medicine) into the SAL Program. A historical perspective of the various Stafford Loan Programs, the history of the University s utilization of the programs, a description of the processes, and the benefits to the University/Students of now switching to the SAL Program, as summarized by the Office of Scholarships and Financial Aid (OSFA), is reflected in the following paragraphs: The Federal Direct Loan Program (FDLP) originated its first Federal Stafford Loans during the academic year as an alternative to the Federal Family Education Loan Program (FFELP). Like many institutions, Wayne State University (WSU) switched from FFELP to FDLP in for its undergraduate and graduate borrowers. WSU s Law School borrowers switched from FFELP to FDLP from through and then returned to FFELP for the academic year. WSU s Medical School borrowers have remained with FFELP throughout this whole timeframe. Page 1

2 Under FDLP, students borrow Federal Stafford Loans directly from the federal government under a one-stop shop concept where participating educational institutions and student borrowers interact only with the federal government (or it s direct contractors) throughout all aspects of the loan process. Under FFELP, as many as three lending community players including a guarantor, a lender, and a servicer - may be involved when a student borrows a Federal Stafford Loan. Additionally, under FFELP, loans may be sold from one lender to another, while under FDLP (at least thus far), all loans are held by the federal government for the life of the loan. Through the early 1990 s, many problems existed within FFELP, including a) guarantors, lenders, and servicers who provided poor customer service; b) guarantors, lenders, and servicers who did not interact well with each other in passing the loan from one entity to the next; c) a lack of substantive benefits/incentives made available to student borrowers; and d) inadequate infrastructure/technology for providing efficient and/or streamlined services. The vast improvements and enhancements that have been made by the FFELP community during the nine years since the inception of FDLP now make FFELP a very attractive alternative to FDLP for those schools participating in FDLP. Numerous FFELP vendors have teamed together through partnerships, consortiums, and contracts to emulate the one-stop shop concept through numerous internet-based loan application and processing systems which interface rather easily with financial aid systems such as SCT Banner and incorporate electronic funds transfer (EFT) as their primary disbursement method. FFELP, today, offers many advantages to both schools and students that didn t exist nine years ago. Provisions under FFELP allow eligible institutions to act as their own Stafford Loan lender for graduate and professional students. This process is commonly known as either School as Lender (SAL) or Graduate School as Lender. While the School as Lender provisions have existed for some time, FFELP lenders have just recently begun marketing this option as a means to draw schools out of Direct Lending and back into FFELP. The business philosophy behind this is rather simple, as these lenders would rather share the profits available under FFELP with the schools, than get no profit at all, by having schools remain in Direct Lending. Under School as Lender (SAL): a) students borrow their Stafford Loans directly from Wayne State University (WSU), as opposed to from the federal government or a banking lender (WSU s SAL lending partner ensures that all federal reporting requirements occur at the time the loan is disbursed) b) WSU has the option of financing these loans internally or through a line-ofcredit established with its SAL lending partner (depending on how quickly Page 2

3 WSU sells the loans to it s SAL lending partner, WSU may or may not have an interest cost associated with a line-of-credit) c) WSU can immediately sell the student loans to its SAL lending partner or it may hold the loans for a period of one day to one year and collect the guaranteed monthly interest rate on the loans from the federal government (paying a lesser rate of interest on a line-of-credit), thus generating income d) eventually (within one day to one year) WSU sells the student loans to its SAL lending partner at a premium (i.e. profit), realizing a substantive amount of income from the sale e) WSU s SAL lending partner holds the loan until the student graduates, at which time the student repays the loan to WSU s SAL lending partner (thus, WSU s SAL lending partner earns income from receiving the balance of the federal government s guaranteed monthly interest payments, while the student is in school, and from the interest paid by the student once in repayment, thereby off-setting the premium paid to purchase the loan from WSU and generating a profit) Per federal regulation [34CFR (a)(7) and 20USC1085(d)(2)(F)] income generated by schools participating in the School as Lender model must be used for a) need-based grant programs for the school s students and b) reasonable administrative expenses directly related to the FFEL Program. As indicated earlier, the School as Lender model is only open to Stafford Loans made to graduate or professional students. During the academic year, WSU originated/disbursed $19,412,082 in Stafford Loans to graduate students and $7,443,024 to law students. There are several different funding models/options available to WSU under the School as Lender option, based on: 1) line-of-credit vs. no line-of-credit, 2) hold loans for a short period of time vs. a long period of time, 3) Department of Education Origination/Lender Fee paid by WSU vs. paid by WSU s SAL lender partner, and 4) WSU paying a third-party servicing fee vs. having that fee waived by WSU s SAL lender partner. Regardless of the options selected, with a graduate/law loan volume of approximately $26,855,106, WSU has the potential (after full implementation) of generating approximately $1,308,870 in revenue, for grants and loan-related administrative expenses, through the School as Lender program. With more than $1,300,000 in revenue, the School as Lender model could provide WSU with resources to fund such reasonable loan-related administrative expenses as an OSFA Loan Manager position and a Fiscal Operations Loan Manager position; as well as more than $1,000,000 in grants to support and further the goals and objectives of the University. In the eyes of the student, the lending processes under both FDLP and School as Lender are very similar: Page 3

4 To obtain a Stafford Loan under Direct Lending, a student: 1) files a FAFSA (Free Application for Federal Student Aid) 2) logs onto the Department of Education s web site to complete an electronic promissory note 3) receives their loan money from WSU when classes begin 4) after graduation, repays their loan to the federal government. To obtain a Stafford Loan under FFELP s School as Lender model, a student: 1) files a FAFSA (Free Application for Federal Student Aid) 2) logs onto WSU s Financial Aid web site to complete an electronic promissory note 3) receives their loan money from WSU when classes begin 4) after graduation, repays their loan to WSU s School as Lender lending partner Additionally, under FFELP, there are a number of back-end benefits available to student borrowers that simply don t exist under Direct Lending. These back-end benefits, which are usually in the form of origination fee, principal, and interest rate reductions, can save students hundreds, if not thousands, of dollars over the life of their loans. Full participation in FFELP opens the door to a number of incidental (and not so incidental) benefits which lender partners would be willing and able to provide to WSU, including things such as: a) telephone response services, b) telephone calling campaign services, c) mass mailings to students, d) development and printing of brochures, training materials, and publicity items, e) special non-need based loan pools for selective groups of students, and f) reduced rate credit cards and/or other consumer banking resources. Participation in the School as Lender model opens the door to a not only an excellent loan product being made available to student borrowers, but also to previously unavailable funding for new positions and grants to benefit WSU students. The University does not want to be responsible for servicing (maintaining student loan accounts, billing students, federal government reporting, etc.) and financing these student loans over the entire life of the loans. Even if the student loans issued are subsequently sold to a third party, such sales typically take place only once a year (near the end of the winter academic term), which creates the need for a temporary financing mechanism. Therefore, the plan, as allowed by the SAL Program, is to have the loans serviced by a Page 4

5 third party and to obtain temporary financing for the student loans issued until the loans can be sold to a third party. University staff evaluated a number of vendors that service and purchase student loans. In addition, they explored the possibility of obtaining the necessary short term financing from these firms, as well as several local financial institutions. The Administration decided that The Nelnet Group had the best overall package for servicing loans, and also had the lowest overall borrowing costs. Utilizing The Nelnet Group for the short term financing has the additional advantage of reducing the University effort associated with the administration of the SAL Program. (In addition, The Nelnet Group does not require a pledge of general revenues as security for the loans.) As a result of these evaluations, the Administration initially plans to use The Nelnet Group to provide the loan servicing, temporary financing and sale of loans related to the SAL Program. The Nelnet Group is a fully integrated higher education finance organization, which provides student loan generation and servicing, secondary market services, and guarantor servicing support. The attached resolution is the authority for the University to obtain the short term financing for the student loans issued, until the time that these loans are sold. In order to provide the SAL Program with sufficient funding flexibility, the Administration is requesting authority to incur short term financing of $40 million per year. The short term financing will only be utilized to the extent that student loans have been issued as part of the SAL Program. The Office of Scholarships and Financial Aid (OSFA) occasionally and routinely make changes to the various financial aid programs (Federal, State and Institutional) that it administers. However, this particular change is being brought to the Board of Governors due to the need for approval for the utilization of university cash and the subsequent borrowing, via the Line of Credit, to finance the loans for a number of months. Page 5

6 RESOLUTION OF THE BOARD OF BOARD OF GOVERNORS OF WAYNE STATE UNIVERSITY APPROVING A LINE OF CREDIT FINANCING STRUCTURE FOR THE GRADUATE AND PROFESSIONAL STUDENT LOAN PROGRAM AND MATTERS RELATED THERETO WHEREAS, the administration of Wayne State University (the University ) has proposed the University participate as a lender of eligible loans (the Loans ) to the University s graduate and professional students under the School-As-Lender Program (the Program ) established under the federal Higher Education Act; and WHEREAS, the administration of the University proposes to contract with an administrator (the Administrator ) under which the Administrator would administer the University s participation in the Program, and would further agree to purchase the Loans from the University upon final disbursement thereof; and WHEREAS, it is necessary for the University to arrange a temporary financing structure in the form of a line of credit (the Line of Credit ) to provide moneys necessary to originate and fund the Loans prior to the time the Loans are sold to the Administrator; and WHEREAS, it is necessary to authorize the President and the Vice President for Finance and Treasurer (each an Authorized Officer ), and each of them singly, to select the provider of the Line of Credit and to negotiate, execute and deliver instruments and documents, and to take actions to implement the Line of Credit as the temporary financing structure for the Loans: NOW THEREFORE, BE IT RESOLVED BY THE BOARD OF GOVERNORS OF WAYNE STATE UNIVERSITY AS FOLLOWS: 1. The Authorized Officers are, and each of them singly is, authorized to select the provider of the Line of Credit following such selection process as an Authorized Officer deems appropriate to produce the best financial terms to the University, and to negotiate, execute and deliver, for and on behalf of the Board, such instruments and documents, and to take such actions, as are necessary to establish the Line of Credit as the temporary financing vehicle for the origination and funding of the Loans. Without further authorization by this Board, The Line of Credit shall be in the maximum principal amount not in excess of the lesser of the amount of principal amount of Loans outstanding at any time held by the University, or $ 27,000,000. Each amount drawn under the Line of Credit shall be repaid, with interest at a rate not in excess of the lesser of the maximum rate permitted by law or 18% per annum, within eighteen months of the date the draw is made. 2. The Line of Credit shall be a limited and not general obligation of the Board, payable from the proceeds of the sale of the Loans, and if deemed necessary or appropriate by an Authorized Officer, from General Revenues, as that term is defined in the trust indentures securing the outstanding General Revenue Bonds of the Board. Repayment of the Line of Credit may be secured, if deemed appropriate or necessary by an Authorized Officer, by a lien on the Loans or proceeds of the repayment or sale of the Loans, and in addition, may be secured by BUDGET AND FINANCE AGENDA JUNE 4, 2003

7 a pledge of General Revenues and moneys in funds and accounts established by the documentation establishing the Line of Credit. 3. The Authorized Officers, the Vice President and General Counsel, the Secretary, and all other appropriate officers of the Board or the University, and any one of them singly, are further authorized to take all necessary actions, and to execute and deliver, for and on behalf of the Board, any and all other instruments, agreements, certificates, filings, contracts, opinions, or other documents, necessary to accomplish the purposes of this resolution. 4. Any reference to an officer of the Board or the University herein shall include any interim or acting officer appointed by the Board. Any action required under the Line of Credit or any document establishing or securing the Line of Credit may be taken by and on behalf of the Board by an Authorized Officer. BUDGET AND FINANCE AGENDA JUNE 4, 2003