Rhode Island Higher Educ. Assistance Authority v. Secretary, U.S. Dept. of Educ.

• Decision Date: 07 February 1991
• Docket Number: No. 90-2118,90-2118
• Citation: 929 F.2d 844
• Parties: 66 Ed. Law Rep. 951 RHODE ISLAND HIGHER EDUCATION ASSISTANCE AUTHORITY, Plaintiff, Appellee, v. SECRETARY, U.S. DEPARTMENT OF EDUCATION, et al., Defendants, Appellants. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 844

929 F.2d 844

66 Ed. Law Rep. 951

RHODE ISLAND HIGHER EDUCATION ASSISTANCE AUTHORITY, Plaintiff, Appellee, v. SECRETARY, U.S. DEPARTMENT OF EDUCATION, et al., Defendants,

Appellants.

No. 90-2118.

United States Court of Appeals, First Circuit.

Heard Feb. 7, 1991.

Decided April 5, 1991.

Neil H. Koslowe, Special Litigation Counsel, Civil Div., U.S. Dept. of Justice, with whom Stuart M. Gerson, Asst. Atty. Gen., Washington, D.C., Lincoln C. Almond, U.S. Atty., Providence, R.I., William Kanter, Deputy Director, Edward C. Stringer, Gen. Counsel, U.S. Dept. of Educ., Harold Jenkins and Brian Siegel, Attys., Dept. of Educ., Washington, D.C., were on brief for defendants, appellants.

Joseph R. Palumbo, Jr., with whom Palumbo, Galvin & Boyle, Middletown, R.I., was on brief, for plaintiff, appellee.

Before TORRUELLA, SELYA and CYR, Circuit Judges.

SELYA, Circuit Judge.

This appeal requires that we consider, for the first time, whether the 1987 amendments to the Higher Education Act of 1965 (the Act), codified as amended at 20 U.S.C. Secs. 1071-1098 (1988), can be applied to alter preexisting contractual rights conferred by the Act. The United States District Court for the District of Rhode Island said that the amendments could not be so utilized. Rhode Island Higher Educ. Assistance Auth. v. Cavazos, 749 F.Supp. 414 (D.R.I.1990) (RIHEAA I). We disagree, thus aligning ourselves with several of our sister circuits. See, e.g., Great Lakes Higher Educ. Corp. v. Cavazos, 911 F.2d 10, 16-17 (7th Cir.1990); Education Assistance Corp. v. Cavazos, 902 F.2d 617, 628-30 (8th Cir.), cert. denied, --- U.S. ----, 111 S.Ct. 246, 112 L.Ed.2d 205 (1990); Ohio Student Loan Comm'n v. Cavazos, 900 F.2d 894, 901-02 (6th Cir.), cert. denied, --- U.S. ----, 111 S.Ct. 245, 112 L.Ed.2d 203 (1990); South Carolina State Educ. Assistance Auth. v. Cavazos, 897 F.2d 1272, 1276-77 (4th Cir.), cert. denied, --- U.S. ----, 111 S.Ct. 243, 112 L.Ed.2d 202 (1990); see also Delaware v. Cavazos, 723 F.Supp. 234, 241-42 (D.Del.1989), aff'd without opinion, 919 F.2d 137 (3d Cir.1990). Consequently, we hold that the Secretary of Education lawfully relied upon the 1987 amendments both in issuing a transfer-of-funds directive to plaintiff-appellee Rhode Island Higher Education Assistance Authority (RIHEAA) and in enforcing the directive by diverting payments otherwise due, notwithstanding the effect of those actions on RIHEAA's preexisting rights to reimbursement.

Our odyssey does not end at that point, for the district court grounded its judgment on alternative holdings. Perscrutation of the record convinces us that the second ground relied on below--the Secretary of Education's supposedly "arbitrary" failure to grant RIHEAA a discretionary waiver relieving it from the amendments' operation, RIHEAA I, 749 F.Supp. at 427--is also unsupportable. Concluding, as we do, that the waiver question should have been more fully explored at the administrative level, we vacate the judgment and order that the case be remanded to the Secretary for further consideration of RIHEAA's waiver request.

I. BACKGROUND

The facts of this case are comprehensively set forth in the lower court's opinion, id. at 415-19, and it would be pleonastic to rehearse them in great detail. Hence, we limn only those facts needed to place the issues on appeal into satisfactory context.

Congress enacted the first version of the Act, establishing the Guaranteed Student Loan Program (GSLP), Pub.L. No. 89-329, 79 Stat. 1232 (1965), in order to make higher education more widely accessible to the populace. To achieve this end, Congress chose to encourage States to implement tuition insurance programs (or, alternatively, to strengthen programs already in existence). S.Rep. No. 673, 89th Cong., 1st Sess., reprinted in 1965 U.S.Code Cong. & Admin.News 4027, 4061-62. The GSLP began with the premise that private lenders would offer student loans at below-market interest rates if the loans were guaranteed; and, from that premise, proceeded to facilitate the provision of such guarantees. See generally Citizens Savings Bank v. Bell, 605 F.Supp. 1033, 1035-36 (D.R.I.1985) (describing GSLP program). The States were accorded some flexibility in fine-tuning the guaranty mechanism. A State desiring to participate in the GSLP could either establish an agency to guarantee student loans, or designate a private, non-profit agency as the surrogate for a governmental unit. Once the guaranty agency was selected, it would enter a series of contracts with the Secretary. The agency would then insure student loans, operating under, and in presumed conformity with, the Act, the contracts, and the extensive program guidelines promulgated by the Secretary. For his part, the Secretary would back the insurance obligations and subsidize interest rates.

In 1977, the Rhode Island General Assembly created RIHEAA, a public corporation, and designated it as the agency in charge of administering the GSLP in Rhode Island. ¹ RIHEAA promptly entered into serial contracts with the Secretary, including a Basic Agreement, an Advances Agreement, a Reinsurance Agreement, and a Supplemental Reinsurance Agreement (SRA). Forsaking comprehensiveness, we mention only selected features of these instruments.

The Basic Agreement recognized RIHEAA as Rhode Island's guaranty agency and provided for an interest rate subsidy to lenders receiving RIHEAA's guaranty. The Advances Agreement entitled RIHEAA to cash advances from the Secretary (ultimately to be repaid). The Reinsurance Agreement, as modified by the SRA, committed the Secretary to reimburse RIHEAA for between 80% and 100% of the losses incurred in meeting its guaranty obligations on defaulted loans (the precise level of reimbursement being dependent on RIHEAA's success in controlling the default rate on the loans which it insured). The Basic Agreement and Reinsurance Agreement each stated that the parties "shall be bound by all changes in the Act or regulations in accordance with their respective effective dates." The agreements also contained language to the effect that, if RIHEAA failed "to comply with any of the [agreements'] provisions ... or applicable Federal law or regulations," the Secretary could withhold reimbursement payments otherwise due. Finally, consistent with 34 C.F.R. Sec. 682.414(b), the agreements obligated RIHEAA to submit detailed financial statements to the Secretary on a regular basis.

After these documents were executed, RIHEAA operated as the State's GSLP guaranty agency. Pursuant to that role RIHEAA entered into guaranty agreements with participating lenders. Generally, these agreements required it to maintain a reserve fund equal to no less than 1% of the aggregate principal balance of all outstanding student loans insured by it. In separate guaranty agreements with (1) lenders participating in the federal Parent Loan for Undergraduate Students (PLUS) Program and (2) the Rhode Island Student Loan Authority (RISLA), RIHEAA pledged to maintain a reserve fund equal to 2% of that balance.

For federal accounting purposes, a guaranty agency's reserve fund is comprised of its cash assets. See 34 C.F.R. Sec. 682.410(a)(1). Federal regulations prohibit the use of these assets for purposes other than those associated with the GSLP. See 34 C.F.R. Sec. 682.410(a)(2). In RIHEAA's case, its reserve fund consisted of guaranty fees charged to lenders, a lump sum inherited from its predecessor agency, see supra note 1, collections from defaulted borrowers, federal advances, reinsurance payments, and administrative cost allowances.

Administrative cost allowances are paid by the Secretary to guaranty agencies to help offset operating costs. See 20 U.S.C. Sec. 1078(f). In 1986, Congress made these allowances mandatory and conferred upon the guaranty agencies a "contractual right" to receive the allowances. Id. at Sec. 1078(f)(1)(B). At the same time, Congress ceded a similar contractual right to the guaranty agencies respecting reinsurance payments:

The Secretary may enter into a guaranty agreement with any guaranty agency, whereby the Secretary shall undertake to reimburse it, under such terms and conditions as the Secretary may establish, with respect to losses (resulting from the default of the student borrower) on the unpaid balance of the principal and accrued interest of any insured loan,.... The guaranty agency shall be deemed to have a contractual right against the United States, during the life of such loan, to receive reimbursement according to the provisions of the subsection.

20 U.S.C. Sec. 1078(c)(1)(A). It is this statutorily created "contractual right" which RIHEAA contends was unlawfully abrogated by the Secretary's retrospective application of the 1987 amendments to the Act, to which we now turn.

In 1987, Congress received a Comptroller General's report suggesting that guaranty agencies across the country had accummlated huge cash reserves, not necessary for the due accomplishment of program-related objectives. See H.R.Conf.Rep. No. 495, 100th Cong., 1st Sess. 518, reprinted in 1987 U.S.Code Cong. & Admin.News 2313-1, 2313-1264. Some of these funds were apparently being used for forbidden purposes. The Comptroller General recommended, therefore, that Congress set limits on the funds that a guaranty agency could keep in reserve, so that the amount held by each agency would correspond to the financial risks it faced in connection with its activities under the GSLP umbrella. Congress addressed this problem in the Omnibus Budget Reconciliation Act (OBRA), Pub.L. No. 100-203, 101 Stat. 1330 (1987), limiting the amount of cash reserves that state-sponsored guaranty agencies could accumulate. The legislative formula for determining the maximum reserve maintainable was geared to an agency's financial condition at the end of the 1986 fiscal year. See 20 U.S.C. Sec. 1072(e). ² An agency holding cash reserves in excess of the formulaic ceiling was obliged...