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The California Student Aid Commission announced Wednesday it will appeal a federal decision to remove California's student loan guaranty, charging that the federal move would cost the state tens of millions of dollars annually.

The U.S. Department of Education in July decided to revoke CSAC's status as a guarantor of federal student loans, citing disputes between CSAC and its nonprofit guaranty arm, EdFund. The department also was concerned that Gov. Arnold Schwarzenegger's Department of Finance was trying to "sell" EdFund for $500 million to relieve California's budget crisis.

Since 1997, Rancho Cordova-based EdFund serviced federal student loans on behalf of CSAC, building a portfolio now worth approximately $38 billion. Agencies such as EdFund insure loans made by private banks under a now-defunct federal student loan program and earn revenues by working with borrowers and collecting on defaults.

USDE decided last month to transfer the portfolio to Minnesota-based Education Credit Management Corp. by Oct. 31. The department said ECMC had experience in taking over guaranty responsibilities for other states such as Oregon and Connecticut. Under the decision, the state would keep $100 million that EdFund has already generated, as well as potentially receive $20 million to $30 million annually in subsequent years, according to federal officials.

ECMC also would contract with EdFund for nine to 12 months during a transition phase. EdFund employs about 400 people locally. Under the federal agreement, ECMC said it would hire about 200 employees after the transition phase.

But CSAC questioned that federal decision and voted 6-2 yesterday to formally appeal. Chairman Barry Keene said that if California were to retain the guaranty, it could generate twice as much annually as what the federal government has offered to provide. He also said the $20 million to $30 million is not guaranteed. CSAC officials said they were excluded from the ECMC decision.

"This action by the U.S. Department of Education puts at risk financial aid to 330,000 California students and disrupts services that support the Cal Grant program and the other specialized federal and state financial aid programs administered by the Commission," the commission said in a statement.

A Department of Education spokesman was not available for comment.

Keene said federal officials had tried to discourage the commission from appealing and said such a challenge would put any revenues at risk. The appeal sets in motion a formal process that CSAC officials said would likely involve an administrative law judge.

Last week, Democratic state legislative leaders sent a letter to the Obama administration and California congressional leaders seeking to reverse the decision. EdFund has provided more than $250 million for Cal Grants in the past.

The Legislature and Schwarzenegger agreed in 2007 to sell EdFund to raise as much as $1 billion in immediate cash for the budget. Those projections turned out to be wildly optimistic. But the Department of Finance in recent months had settled on two bidders for EdFund's portfolio that had offered to provide the state with as much as $504 million spread over eight years, according to one source close to negotiations.


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