Untitled Texas Attorney General Opinion ( 1985 )

The Attorrwy General of Texas
Mardi 21, 1985
JIM MAlTOX
Attorney General
Supreme Court Building Mr. Kenneth 8. Ashimrth Opinion No. JM-303
P. 0. BOX 12548 Cosanissioner
Auslln, TX. 78711-2548 Coordinating Board Re: Whether federal money
512l4752501
Texas College h University System received by the Hinson-
Telex 9101874-1387
Telecopier 512,475G?86 P. 0. Box 12788 Haslewood College Student Loan
Austin, Texas 78711 Program as a lender's special
allowance is subject to the
714 Jackson, Suite 7W provisions of section 52.17 of
Dallas, TX. 752024505
214l7428044
the Education Code
Dear Mr. Ashworth:
4824 Alberta Ave., Suite 160
El Paso. TX. 79905.2793 You have asked our opinion about the application of section
915/53334&1 52.17 of the Texas Education Code to certain funds received by the
Coordinating Board from the federal government. Your letter reads in
1001 Texas, Suite 700 part:
Howhn, TX. 770023111
7132295886 Chapter 52 of the Texas Education Code provides
for the coordinating board to administer the
Hinson-Haalewood College Student Loan Program
806 Broadway, Suite 312
Lubbock, TX. 794063479 authorize,5by article III, sectton 50b and section
8081747.5238 Sob-1 of the Texas Constitution.
Under this authority the board sells Texas
4309 N. Tenth. Suite B
McAllen, TX. 78501-1885
College Student Loan Bonds, the proceeds from
512682-4547 which are deposited in the Texas Opportunity Plan
Fund in the state treasury until needed to make
loans to 'eligiblestudents.
200 Main Plaza, Suite 400
San Antonio, TX. 782052797
51212254191
Money received by the board as repayment of
principal and interest on loans must be deposited
to the !:exas College Student Loan Bonds Interest
An Equal OpportUnityI and Sinking Fund, as provided in section 52.17 of
Attirmatlve Action Employer the Education Code, to pay the interest and
principal coming due on bonds and to maintain a
reserve for such purpose. When the amount in the
Interest and Sinking Fund exceeds requirements,
the excess may then be deposited in the Texas
Opportunity Plan Fund for use in making additional
loans to .aligiblestudents.
p. 1373
.
Mr. Kenneth H. Ashwarth - P,sge2 (JM-303)
. . . .
The federal program recognizes that the
established rateci of interest are generally too
low to cause lenders to be willing to make loans
to students under the program and, therefore,
provides for a variable lender's special allowance
designed to increase the income from such loans up
to the regular market level.
. . . .
To clarify hoa we may use such funds in the
future, we w0ul.C: appreciate your opinion on
whether the money received by the H-inson-Hazlewood
program from the special lender's allowance should
be considered as .intereston loans and therefore
be subject to the provisions of section
52.17. . . .
Article III, section 50b of the Texas Constitution was adopted in
1965. For the first time, it allowed the Coordinating Board of the
Texas College and University System, if permitted by the legislature,
to sell Texas College Student Loan Bonds, and set out in subsection
(b) the manner in which the bond proceeds were to be used:
(b) All moneys received from the sale of such
bonds shall be deposited in a fund hereby created
in the State Trtzrsury to be known as the Texas
Opportunity Plan Fund to be administered by the
Coordinating Board, Texas College and University
System, or its successor or successors to make
loans to students who have been admitted to attend
any institution of higher education within the
State of Texas, public or private, including
Junior Colleges, which are recognized or
accredited under terms and conditions prescribed
by the Legislature, and to pay interest and
principal on suck.bonds and provide a sinking fund
therefor under such conditions as the Legislature
may prescribe.
The Fifty-ninth Legis:.aturemade the necessary provisions. Acts
1965, 59th Leg., ch. 101 at 229. The Texas College Student Loan Bonds
Interest and Sinking Fund was established by a provision codified as
article 2654g. V.T.C.S. (article II, section 7). which was amended in
1967 and, as amended, lateI,incorporated into the Texas Education Code
as section 52.17 thereof. It currently reads in part:
p. 1374
Mr. Kenneth H. Ashworth - Pzig;e
3 (JM-303)
(a) Each fis&t year a sufficient portion of
the funds receivr,dby the board as repayment of
student loans grsnted under this chapter and as
interest on the loans
-- shall be deposited in the
state treasury in the Texas College Student Loan
Bonds Interest and. Sinking Fund, referred to in
this chapter as t'3einterest and sinking fund, to
pay the interest and principal coming due during
the ensuing fiscal year and to establish and
maintain a reserve in the interest and sinking
fund equal to the average annual principal and
interest requirements of all outstanding bonds
issued under this chapter.
(b) If in any year funds are received in
excess of the foregoing requirements, then the
excess shall be deilositedin the Texas Opportunity
Plan Fund and map' be used for the same purposes
and upon the same-terms and conditions prescribed
for the proceeds-derived from the sale of the
Texas College S&dent Loan Bonds. (Emphasis
added).
In 1969, another constitutional amendment was adopted (article
III, section Sob-l) which ~lcreased the amount of bonds that could be
issued for student loan pcrposes (subsection (a)), but it provided
that they should "be handled as provided in Section 50b of the
Constitution and the laws enacted pursuant thereto" (subsection (b)).
Thus, the provisions of section 52.17 of the Education Code, set out
above, apply to bonds authorized by both constitutional amendments.
We are of the opinion that the words of the statute, "interest on
the loans," embrace "special lenders' allowance" funds received from
the federal government, and it is unnecessary tc decide whether a
contrary legislative intent would comport with the constitutional
provisions. -Cf. Tex. Const. art. III, BSOb(d).
As explained by the Co& of Federal Regulations:
The Secretary pays a [Guaranteed Student Loan
Program] lender II portion of the interest on a
loan on behalf of sn otherwise eligible borrower.
This payment is 'inown as interest benefits. 34
CFR 9682.300(a).
. . . .
The Secretary pays a special allowance to
lenders on all [Guaranteed Student Loan Program]
p. 1375
Mr. Kenneth H. Ashworth - P,age4 (a-303)
loans. The spe'xtal allowance is equal to a
percentage of the average unpaid balance of
principal, includ,tngcapitalized interest, for all
GSLP loans a lender has held during a 3-month
period. 34 CFR §l%i;!.302(a).
The program is designed to enable persons to acquire a higher
education by offering them low-interest loans that they need not begin
repaying until they have completed school. Lending institutions are
induced to make loans to students at rates below the market rate by
requiring the federal government: (a) to pay the low rate of interest
on the loan the student hacr agreed to pay until the student actually
starts paying it himself; and (b) to pay additionally a rate on the
aggregate of the lender's outstanding student loans (the special
allowance) until they arc all repaid. The additional "special
allowance" rate to be receiv,sdby the lender for the use of his money
is pegged at a percentage cf the bond equivalent rates of the 91-day
treasury bills auctioned during the 3-month period. 20 U.S.C.
51087-l(b)(2)(A). The lender receives two tiers of compensation for
the loan.
An earlier method of calculating the "special allowance" has
changed but its character has:not. As Senate Report No. 882 disclosed
in discussing the allowance as previously calculated:
Special allowance,3 are paid to lenders to
encourage participstion in the program. The rate
provides for up ix 3% interest payments to lenders
in addition to the 7% basic rate for a total
interest compensation of up to 10%.
Senate Report No. 882, 94th Cong., 2d Sess. 18. reprinted in 1976 U.S.
Code Cong. 4 Admin. News 4713, 4730.
In Attorney General Opinion JM-178 (1984), the character of
federal payments made in c:onnection with such student loans was
discussed. It was there said:
The student higher education loans in question
usually are made by private lending institutions
at interest rats:: lower than the generally
available rates. We understand that until the
loan is in pay-back status, the holder of the loan
receives from the federal government an interest
subsidy payment For the facial amount of the
interest plus a variable lenders special allowance
that brings the interest income up to the regular
market level of interest. . . . We believe that
the interest inconleto a lending institution that
p. 1376
, .
Mr. Keineth A. A&worth - Eage 5 (JM-303)
it receives as the holder of a guaranteed student
loan constitutes an economic benefit within the
meaning of article 988b.
The additional "special allowance" continues to be paid by the federal
government (in the case of default) so long as the borrower has not
repaid the loan, the lendt!rhas not received payment on a claim of
loss for the loan, or a claim for loss on the loan has not been
finally refused. 20 U.S.C. 51087-l; 34 CFR 1682.302(d)(3).
In Texas, by whatevu name it is called, "interest" is the
compensation allowed by :Lrw for the use or detention of money.
V.T.C.S. art. 5069-1.01(a). "It is not the labeling of payments that
determines whether they constitute interest, but rather, it is the
substance of the transactj.cmwhich controls." Delta Enterprises V.
s: %;.3+.;:2d 555, 558 (Tex. Civ. App. - Fort Worth 1977, writ
As the Texas Supreme Court held in Gonzales County
Savings & Loan Associatiop v. Freeman, 534 S.W.2d 903, 906 (Tex.
1976):
Labels put on particular charges are not con-
trolling. A charge which is in fact compensation
for the use, forbearance or detention of money is,
by definition, interest regardless of the label
placed on it by the lender. Art. 5069-1.01(a).
We think there can be no doubt that the special allowsnces paid
lenders by the federal goT'e,rnmentin connection with the Guaranteed
Student Loan Program const:.t:ute
payments for the use, forbearance, or
detention of money and, therefore, are funds received by the board as
interest on loans within l:hemeaning of section 52.17 of the Texas
Education Code. They are subject, in our opinion, to its provisions.
SUMMARY
Special allowances paid lenders by the federal
government pursxmt to the Hinson-Razlewood
program and the federal Guaranteed Student Loan
Program constitute interest on loans within the
meaning of sectix~ 52.17 of the Texas Education
Code.
Very truly yours
s
J-/k
JIM MATTOX
Attorney General of Texas
p. 1377
Mr. Kenneth H. Ashworth - Page 6 (JM-303)
TOM GREEN
First Assistant Attorney General
DAVID R. RICHARDS
Executive Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Bruce YoungblooC,
Assistant Attorney General
APPROVED:
OPINION COMMITTEE
Colin Carl
Susan Garrison
Tony Guillory
Jennifer Riggs
Bruce Youngblood
p. 1378