Great Lakes Higher Educ. Corp. v. Cavazos

• Decision Date: 14 April 1989
• Docket Number: No. 88-C-159-C.,88-C-159-C.
• Citation: 711 F. Supp. 485
• Parties: GREAT LAKES HIGHER EDUCATION CORPORATION, a non-profit Chapter 181 Wisconsin corporation, Plaintiff, v. Lauro F. CAVAZOS, Secretary of the United States Department of Education; and United States Department of Education, Defendants.
• Court: U.S. District Court — Western District of Wisconsin

711 F. Supp. 485

GREAT LAKES HIGHER EDUCATION CORPORATION, a non-profit Chapter 181 Wisconsin corporation, Plaintiff, v. Lauro F. CAVAZOS, Secretary of the United States Department of Education; and United States Department of Education, Defendants.

No. 88-C-159-C.

United States District Court, W.D. Wisconsin.

April 14, 1989.

David J. Hanson, Michael, Best & Friedrich, Madison, Wis., for plaintiff.

Neil H. Koslowe, Sp. Litigation Counsel, Civ. Div., Dept. of Justice, Washington, D.C., for defendants.

ORDER

CRABB, Chief Judge.

In this civil action for declaratory judgment plaintiff challenges the constitutionality of the 1987 amendments to the Higher Education Act of 1965 which mandate the elimination of $250 million from excess cash reserves held by guarantors participating in the Guaranteed Student Loan Program. 20 U.S.C. §§ 1072(e)(1), 1072(e)(2), 1078(c)(1), 1078(f)(1)(B), 1078(c)(9)(A). Plaintiff also challenges the constitutionality of defendants' implementation of those amendments by withholding reinsurance payments due plaintiff until $13,490,858 in excess reserves was recovered. Plaintiff contends that the 1987 amendments abrogate its contractual rights and repudiate federal debts, take its property without compensation and due process, and create classifications that are not rationally related to a legitimate legislative purpose, in violation of its Fifth Amendment rights to just compensation, due process and equal protection, and in violation of the Fourteenth Amendment.

Now before the court are the parties' motions for summary judgment on the Fifth and Fourteenth Amendment claims. Because federal regulation and at least one of the parties' agreements provide expressly that the agreements are subject to statutory and regulatory change (and plaintiff has complied with such changes as, for example, the 1986 imposition of a reinsurance fee tied to its claims rate and the 1987 imposition of more stringent due diligence standards), I find that plaintiff's contractual rights are subject to statutory and regulatory amendment and that such amendment may change the terms governing obligations that have already arisen pursuant to the agreements. Accordingly, I conclude that the amendments that changed the terms at issue to require compliance with the elimination of excess reserves provisions do not abrogate plaintiff's contractual rights, and similarly, that the change in defendants' obligations that result from the amendments do not repudiate any federal debt.

Having determined that plaintiff's contractual rights to the receipt of pending as well as future administrative cost allowances and reinsurance payments may be properly conditioned on its compliance with the excess reserves reduction amendments, I find that the effect of the contested amendments is not to take away money in plaintiff's reserve fund but to require it to spend that money for specific Guaranteed Student Loan Program purposes as prescribed by regulation, until its reserve fund reaches a predetermined level. I conclude that such an effect is not a taking within the meaning of the Fifth Amendment. Finally, I find that the classifications created by the contested amendments are reasonably related to a legitimate purpose and do not violate plaintiff's right to equal protection. Accordingly, I will grant defendants' motion for summary judgment.

Based on the parties' proposed findings of fact, supporting affidavits and attached documents, and for the purpose of deciding their summary judgment motions only, I find there is no genuine issue as to the following material facts.¹

Findings of Fact

The Parties

Plaintiff is a non-profit Wisconsin corporation whose principal business since 1986 has been the guaranty and servicing of student loans under the federal Guaranteed Student Loan Program pursuant to §§ 421 et seq. of the Higher Education Act of 1965, as amended. 20 U.S.C. §§ 1071 et seq.

Defendant Cavazos is the Secretary of the United States Department of Education administering the Guaranteed Student Loan Program pursuant to §§ 421 et seq. of the Higher Education Act of 1965, as amended.

Defendant Department of Education is an agency of the United States Government, and administers the Guaranteed Student Loan Program pursuant to §§ 421 et seq. of the Higher Education Act of 1965, as amended.

The Guaranteed Student Loan Program

Under the Guaranteed Student Loan Program, lenders make low-interest loans subsidized by the federal government to students under the protection of guarantees issued by fifty-eight state or private, non-profit agencies, who are in turn reinsured by the Department of Education. Its average annual loan volume is now $7.4 billion.

The program involves five separate parties: the lender, the student borrower, the institution the student attends, the guaranty agency, and the Department of Education.

The guaranty agency is the link between the lender and the Department of Education. It administers the program at the state and local levels. Its primary function is to issue guarantees to lenders on qualifying loans, for which it collects insurance premiums paid by the lenders but passed on to the borrowers. Guaranty agencies must insure one hundred percent of the amount of these loans.

When a borrower fails to repay a loan, the lender must first satisfy due diligence collection requirements. It then files a claim with the guaranty agency and the agency pays the claim. It is the agency's obligation to attempt to collect the unpaid balance of the loans on which it has paid default claims directly from the borrowers.

The funds available to guaranty agencies to carry out their responsibilities come from insurance premiums of up to three percent of the loan, charged to lenders and generally paid by student borrowers; federal advances, federal administrative cost allowances, and federal reinsurance payments; a portion of collections on defaulted loans; state appropriations; investments; and other sources. All money received by guaranty agencies must be deposited in their reserves and may be used for Guaranteed Student Loan Program purposes specified by regulation.²

Under 34 C.F.R. §§ 682.410(a)(2)-(4), guaranty agencies may use their reserve funds only to: guarantee loans; pay default claims; pay death, disability, and bankruptcy claims; refund overpayments of insurance premiums; pay the Secretary of Education's equitable share of borrower payments; repay advances; and pay for the proper administration of the agency's loan guaranty program.

The Department of Education reinsures the guarantees issued by the guaranty agencies and, subject to applicable laws and regulations, reimburses guaranty agencies who have paid a lender's default claim and have complied with applicable laws and regulations. Under present law the rate of reimbursement is one hundred percent for agencies whose overall claims rate is five percent or lower; ninety percent for agencies whose claims rate is between five percent and nine percent; and eighty percent for agencies whose claims rate is above nine percent (the claims rate is the amount of reinsurance requested to cover payments on lenders' default claims as a percentage of guaranteed loans in repayment at the end of the preceding fiscal year).

The Department of Education also reimburses the guaranty agencies for a portion of their administrative costs, and has provided advances to help the agencies maintain adequate cash reserves for claims and other expenses.

The relationship between the Department of Education and the guaranty agencies is formalized by written agreements: the "insurance program agreement" (20 U.S.C. § 1078(b)); the "federal advances for claim payments agreement;" the "reinsurance" and the "supplemental reinsurance" agreements, now combined into a single "guaranty agreement" (20 U.S.C. § 1078(c)); and the "secondary administrative cost allowance agreement." The contents of the agreements are governed by the Higher Education Act, 20 U.S.C. §§ 1078(b)(2), (c)(2), and they are expressly "subject to subsequent changes in the Act or the regulations that apply to the Guaranteed Student Loan Program."³ 34 C.F. R. § 682.400(d).

Federal appropriations support the Guaranteed Student Loan Program, although the money lent to students under the program comes from banks and other non-governmental sources. In fiscal year 1985, total federal costs under the Guaranteed Student Loan Program were $4.1 billion, of which $3.8 billion was funded by appropriations from Congress. The balance of the costs was funded by revenues from the program, including an origination fee on each loan and a portion of collections on defaulted loans.

In 1986 Congress enacted legislation to contain Guaranteed Student Loan Program costs. In the Consolidated Omnibus Budget Reconciliation Act of 1985, Pub.L. No. 99-272, 100 Stat. 82, 339, enacted on April 7, 1986, Congress directed the Secretary to recover $75 million in federal advances during fiscal year 1988, and to deposit that money in the student loan insurance fund established by 20 U.S.C. § 1081(a), to be used for making payments in connection with defaulted loans under guaranty and reinsurance agreements. Under the Higher Education Amendments of 1986, Pub.L. No. 99-498, 100 Stat. 1268, 1357, enacted on October 17, 1986 (now codified at 20 U.S.C. § 1072(d)(1)), Congress directed the Secretary to recover an additional $35 million in federal advances during fiscal year 1989.

In the Higher Education Amendments of 1986 Congress imposed a reinsurance fee on guaranty agencies for the first time. Also, Congress made it explicit that guaranty agencies were deemed to have "a contractual right as against the United States" to receive reinsurance payments and administrative cost allowances from the Secretary of Education. 20 U.S.C. §§ 1078(c)(1)(A) and (f)(1)(B).

Reduction of Excess Cash Reserves

The term "reserves" is not defined in the Higher Education ...