Can a Texas public college share the default risk on private student loans and discount tuition in return?

TX AG Opinion GA-0743: Can a public college share default risk on private student loans and discount tuition?

Plain-English summary

The Texas State Technical College System (TSTC) was weighing a proposal from a private lender (a Brazos proposal) to fund students' tuition through private education loans, with TSTC and the loan holder sharing the risk if a student defaulted. In the example given, a lender would put up a $10,000 loan; part would go straight to TSTC and the rest into an escrow account. If the student did not default, TSTC and the lender would split the escrow, so the student would effectively pay reduced tuition. If the student did default, TSTC would give back some or all of what it received, meaning it had taught the course for reduced (possibly zero) tuition. Chancellor Bill Segura's general counsel asked whether TSTC could share default risk like this.

The opinion started with a limit on its own role: the Attorney General does not approve, review, or comment on the terms of a specific proposed contract, so whether this particular deal was valid and enforceable was outside the opinion process. What the opinion could do was lay out the governing legal principles.

The first is constitutional. Article III, sections 50 and 51 forbid the state from granting public money or lending its credit to an individual. But a long line of authority reads those provisions to permit a public entity to spend public funds in a way that benefits a private party if the governing body (1) determines the expenditure serves a public purpose and (2) puts sufficient controls on the transaction to ensure that purpose is carried out. So even assuming TSTC's participation served a public purpose, the opinion could not tell, on the limited facts, whether adequate controls existed. The TSTC board has to make those findings in the first instance, subject to judicial review.

The second is statutory. The proposal would have TSTC offering reduced tuition, and chapter 54 of the Education Code controls tuition. Section 54.051 requires TSTC to collect tuition at the rates the statute sets. Section 54.010 lets the board reduce tuition, but only as part of an adopted institutional policy aimed at increasing course loads or improving retention and graduation, only for students meeting enrollment conditions, and only up to a capped amount. Any tuition discount under the proposal would have to satisfy those provisions. The opinion also flagged that programs financed partly by state funds may need prior approval from the Texas Higher Education Coordinating Board.

Currency note

This opinion was issued in 2009. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

The tuition statutes in chapter 54 of the Education Code, the TSTC provisions in chapter 135, and the Coordinating Board rules may have been amended since 2009. Confirm current law before relying on anything below.

Who this opinion affected (as of 2009)

TSTC and its governing board: The opinion described the board, not the AG, as the body that must determine in the first instance whether the loan proposal served a public purpose and had sufficient controls, and whether any tuition discount complied with chapter 54.

Private lenders proposing risk-sharing deals: The opinion explained that a public benefit with adequate controls is what keeps such an arrangement on the right side of article III, sections 50 and 51; a bare benefit to the lender or to individual students would not.

TSTC students: The opinion described reduced tuition as permissible only within the narrow limits of section 54.010, not as an open-ended discount the college could grant through a private loan deal.

Common questions

Did the Attorney General approve TSTC's loan risk-sharing plan?
No. The opinion explained that the AG does not review or approve the terms of a specific proposed contract; that determination belongs to the TSTC board, subject to court review.

Does sharing default risk with a private lender violate the constitution?
Not necessarily. The opinion said article III, sections 50 and 51 are not violated if the arrangement serves a legitimate public purpose of TSTC and includes sufficient controls to ensure that purpose is met. The board has to make those findings.

Could TSTC just discount tuition to make the deal work?
Only within limits. The opinion explained that TSTC must collect the tuition rates set by section 54.051 and may reduce tuition only under the specific conditions and caps in section 54.010.

Who decides whether the proposal is legal?
The TSTC board, in the first instance, subject to judicial and administrative review. The opinion noted that programs partly financed by state funds may also need Coordinating Board approval.

Background and statutory framework

The opinion declined to rule on the specific contract, citing the office's practice of not approving particular proposed contracts (whether a contract comports with statutory requirements involves questions of fact and contract interpretation beyond an AG opinion). On the constitutional principles, it relied on the rule that a transfer of funds for a public purpose with a clear public benefit does not violate article III, section 51 (Edgewood Indep. Sch. Dist. v. Meno, 917 S.W.2d 717, 740 (Tex. 1995)), that the public purpose must be an authorized purpose of the entity (Byrd v. City of Dallas, 6 S.W.2d 738, 740 (Tex. 1928)), and that section 50 is likewise satisfied when a public purpose and adequate controls exist (Tex. Const. art. III, §§ 50, 51). Earlier opinions had upheld student financial-assistance programs serving a public purpose.

On tuition, TSTC is an institution of higher education and a public technical institute (Tex. Educ. Code Ann. §§ 54.001(1) (Vernon 2006); 61.003(8), (9) (Vernon Supp. 2009)), required to collect set tuition (id. §§ 54.051(b), (k) (Vernon 2006); 135.52(a) (Vernon Supp. 2009)) and to retain and account for tuition as the appropriations act provides (id. § 54.004 (Vernon 2006); General Appropriations Act, 81st Leg., R.S., ch. 1424, art. III, § 16, 2009 Tex. Sess. Law Serv. 4481, 4951). Tuition may be reduced only under section 54.010(a) (as part of an adopted policy to increase course loads or improve retention and graduation, for qualifying students) and only up to the cap in section 54.010(c). Programs partly financed from state funds are subject to prior Coordinating Board approval (id. § 135.04 (Vernon 2002); 19 Tex. Admin. Code § 11.27 (2009)).

Citations

Statutes and constitutional provisions:

• Tex. Const. art. III, §§ 50, 51
• Tex. Educ. Code Ann. §§ 54.001(1), 54.004, 54.051(b), (k) (Vernon 2006); 54.010(a), (c); 61.003(8), (9), 135.52(a) (Vernon Supp. 2009); 135.04 (Vernon 2002)
• General Appropriations Act, 81st Leg., R.S., ch. 1424, art. III, § 16, 2009 Tex. Sess. Law Serv. 4481, 4951
• 19 Tex. Admin. Code § 11.27 (2009)

Cases:

• Edgewood Indep. Sch. Dist. v. Meno, 917 S.W.2d 717 (Tex. 1995)
• Byrd v. City of Dallas, 6 S.W.2d 738 (Tex. 1928)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/greg-abbott/ga-0743
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2009/ga0743.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

ATTORNEY GENERAL OF TEXAS

GREG ABBOTT

October 27, 2009

Mr. Bill Segura, Chancellor
Texas State Technical College System
3801 Campus Drive
Waco, Texas 76705

Opinion No. GA-0743

Re: Whether Texas State Technical College (TSTC) can legally enter into a student loan program with a private lender, whereby TSTC and the private lender share the risk of students defaulting on the loans (RQ-0803-GA)

Dear Mr. Segura:

On behalf of the Texas State Technical College System ("TSTC"), your general counsel has asked for an opinion regarding a private loan proposal to help fund TSTC students' tuition.[1] Under the proposal, a private corporation would "make funding available for private education loans to students attending" TSTC, and "the holder of the loan and TSTC [would] share in the risk of defaults."[2] The Proposal provides, as a hypothetical example, a situation where a lender agrees to provide a loan of $10,000.00 for a TSTC student's tuition. Proposal at 2. A percentage of that money would be distributed outright from the lender to TSTC, and the remainder would be placed in an escrow account. See id. If the borrower did not default, the holder of the loan and TSTC would divide the amount in escrow between them. Because of this shared escrow account, TSTC would always be offering these students a reduced tuition. See id. However, in the event of a default, TSTC would return "some or potentially all of the funds received from the lender, resulting in a course taught for a reduced tuition, potentially reduced all the way to zero."[3] Based on this Proposal, your general counsel asks, "can [TSTC] risk share in the loans made by a third party lender?" General Counsel Letter.

Your general counsel does not provide us with any additional information about the Proposal, nor does he indicate any specific legal concerns that TSTC has regarding this Proposal. We note at the outset that this office does not approve, review, or comment on the terms of any particular proposed contract in the opinion process. Tex. Att'y Gen. Op. Nos. GA-0078 (2003) at 2, JC-0450 (2002) at 4, JM-0697 (1987) at 6. Therefore, a determination as to whether this particular Proposal is valid and enforceable is outside the scope of the opinion process. Tex. Att'y Gen. Op. No. GA-0252 (2004) at 6 (final determination of whether a contract comports with statutory requirements involves questions of fact and contract interpretation and is beyond the purview of an attorney general opinion). However, we can address general legal principles that may be relevant to whether this Proposal is permitted under the law. Tex. Att'y Gen. Op. No. GA-0176 (2004) at 2.

We first note that article III, sections 50 and 51 of the Texas Constitution forbid the granting of public money and the lending of the state's credit to an individual. TEX. CONST. art. III, §§ 50, 51. Section 51 prevents the gratuitous application of public funds to any individual, but a "transfer of funds for a public purpose, with a clear public benefit received in return, does not amount to a lending of credit or grant of public funds in violation of article III, section[] 51." Edgewood Indep. Sch. Dist. v. Meno, 917 S.W.2d 717, 740 (Tex. 1995). "Attorneys general long have interpreted section 51 not to forbid a state agency from expending public funds in a way 'that benefits a private person or entity if the ... governing body (i) determines that the expenditure serves a public purpose and (ii) places sufficient controls on the transaction to ensure that the public purpose is carried out.'" Tex. Att'y Gen. Op. No. JC-0484 (2002) at 4. The public purpose served by the expenditure must be an authorized public purpose of the political subdivision. Byrd v. City of Dallas, 6 S.W.2d 738, 740 (Tex. 1928); Tex. Att'y Gen. Op. No. JC-0434 (2001) at 13. Section 50 similarly prohibits the Legislature from giving or lending, or authorizing "the giving or lending, of the credit of the State in aid of, or to any person, association, or corporation." TEX. CONST. art. III, § 50. Like section 51, section 50 is not implicated if the gift or loan serves a public purpose of the entity expending the funds and includes controls to ensure that the public purpose is accomplished. See Tex. Att'y Gen. Op. Nos. GA-0033 (2003) at 8, JC-0489 (2002) at 6.

Although this office has not addressed proposals exactly like that which you put forth, it has analyzed other student financial assistance issues in light of the prohibitions established in article III of the Texas Constitution. See, e.g., Tex. Att'y Gen. Op. No. H-1010 (1977) at 1-2; Tex. Att'y Gen. LA-90 (1975) at 1. For example, in H-1010 this office reviewed a county and city grant "to a medical student in exchange for the student's contractual promise that he [would] serve as the county's health officer," and the grant included an agreement that some of the student's debt would "be discharged in partial consideration for his services." Tex. Att'y Gen. Op. No. H-1010 (1977) at 1. Concluding "that the establishment, staffing and operation of a community medical clinic constitutes a public purpose," this office determined that the financial assistance program presented "no constitutional infirmity." Id. at 3-4; see also Tex. Att'y Gen. LA-119 (1977) at 2 (concluding that a program to guarantee student loans could constitutionally be established).

In regard to the Proposal at issue, even assuming TSTC's participation in the private loan program serves an authorized public purpose of TSTC, given the limited facts we have regarding the Proposal, we are unable to determine whether adequate controls exist to ensure that the public purpose is met. The TSTC board will have to examine the specific contract at issue and make findings regarding the existence of a public purpose of TSTC and sufficient controls. The board must determine in the first instance, subject to judicial review, whether to accept the Proposal. See Tex. Att'y Gen. Op. No. JM-1091 (1989) at 2 (concluding that a university must determine, in the first instance, whether a public purpose exists and make a finding regarding the same).

Aside from the constitutional questions raised by this Proposal, of additional concern is that the Proposal will require TSTC to offer courses "for a reduced tuition." See General Counsel Letter. Chapter 54 of the Education Code governs the tuition and fees charged by an institution of higher education.[4] Section 54.051 of that chapter requires "[t]he governing board of ... the Texas State Technical College System [to collect] from students registering at the institution tuition or registration fees at the rates prescribed in this section." TEX. EDUC. CODE ANN. § 54.051(b) (Vernon 2006); see also id. § 135.52(a) (Vernon Supp. 2009) ("The board [of TSTC] shall collect tuition at the rates provided by law ...."). Specifically, the Legislature requires that the following rates be charged for tuition at TSTC:

Tuition for a resident student registered at the Texas State Technical College System is the greater of $50 or an amount set by the governing board of the system at not less than $16 per semester credit hour. Tuition for a nonresident student registered at the Texas State Technical College System is an amount set by the governing board of the system at not less than $80 per semester credit hour.

Id. § 54.051(k) (Vernon 2006).[5]

The Legislature has authorized the governing board of TSTC to reduce the amount of tuition charged to a student to an amount less than the amount otherwise required, but only if certain requirements are met. Id. § 54.010(a). Specifically, any tuition reduction must be "part of an institutional policy adopted by [TSTC's board of regents] to: (A) increase the average semester credit hour course load of students ... ; or (B) improve the retention and graduation rate of students enrolled." Id. Prior to offering the reduction, the board must "determine[] that the student is: (A) enrolled in, and making satisfactory progress toward completion of, a degree program offered at the institution; and (B) enrolled in at least 15 semester credit hours at the institution during the semester or term for which the reduction is offered." Id. Furthermore, TSTC is limited in the amount of any tuition reduction that it offers to students. Id. § 54.010(c) ("The amount of tuition reduction offered to a student under this section for a semester or term may not exceed the amount of tuition that would have been charged to the student under this chapter for enrollment in three semester credit hours during that semester or term."). While we do not have sufficient information to determine how tuition discounts would occur under the Proposal, to the extent that TSTC would be offering students reduced tuition, such reductions must comply with these provisions, as we find no other authority for TSTC to offer reduced tuition rates.

Finally, we note that "[e]ducational programs wholly or partially financed from state funds are subject to the prior approval or disapproval and continuing review of the coordinating board." Id. § 135.04 (Vernon 2002); see also 19 TEX. ADMIN. CODE § 11.27 (2009) (Tex. State Technical Coll. Sys., New Program and Course Approval) ("Courses and programs ... partially financed from state funds are subject to the prior approval" of the Texas Higher Education Coordinating Board.). To the extent that the Proposal falls under this category, we advise you to seek approval from the Coordinating Board before agreeing to it.

In the end, the initial determination of whether the Proposal comports with these or any other limitations under state or federal law is to be made by the TSTC board, subject to judicial and administrative review. Such a determination is beyond the purview of an attorney general opinion. See Tex. Att'y Gen. Op. No. GA-0252 (2004) at 6 (junior college district's authority to lease campus land to private foundation involves questions of facts and contract interpretation).

SUMMARY

Article III, sections 50 and 51 of the Texas Constitution forbid the granting of public money and the lending of the state's credit solely to an individual, although expenditures which incidentally benefit private entities are permitted if made for a legitimate public purpose. Texas State Technical College's discharge of student loans under the proffered loan proposal would be constitutional only if made for a legitimate public purpose and if adequate controls existed to ensure that the public purpose is met.

Section 54.051 of the Education Code requires the Texas State Technical College board to collect set tuition and fees from students attending the institution. The Legislature has authorized the board to reduce the amount of tuition charged in certain circumstances, but only if specific requirements are met. If Texas State Technical College discounts students' tuition under the proffered loan proposal, it must ensure that it meets these requirements.

ANDREW WEBER
First Assistant Attorney General

JONATHAN K. FRELS
Deputy Attorney General for Legal Counsel

NANCY S. FULLER
Chair, Opinion Committee

Virginia K. Hoelscher
Assistant Attorney General, Opinion Committee

[Footnote 1: Request Letter at 1 (available at http://www.texasattorneygeneral.gov).]

[Footnote 2: Brazos Proposal for Private Loan Program at 1 (attached to Request Letter) [hereinafter Proposal].]

[Footnote 3: Letter from Ray Rushing, General Counsel to TSTC, to Nancy Fuller, Chair, Opinion Committee (June 5, 2009) (on file with the Opinion Committee) [hereinafter General Counsel Letter].]

[Footnote 4: For purposes of chapter 54, TSTC is included in the definition of an institution of higher education. See TEX. EDUC. CODE ANN. §§ 54.001(1) (Vernon 2006) ("'Institution of higher education' has the same meaning as is assigned to it by Section 61.003 of this code."); 61.003(9) (Vernon Supp. 2009) ("'Public technical institute' means ... the Texas State Technical College System."); 61.003(8) (Vernon Supp. 2009) ("'Institution of higher education' means any public technical institute ....").]

[Footnote 5: The 2009 General Appropriations Act prohibits institutions of higher education from receiving certain appropriations under the act unless it collects tuition in accordance with requirements of chapter 54 of the Education Code. See General Appropriations Act, 81st Leg., R.S., ch. 1424, art. III, § 16, 2009 Tex. Sess. Law Serv. 4481, 4951 ("No institution of higher education shall receive appropriations through formula funding in this Act unless it collects from each student whose semester credit hours are to be included in formula funding calculations all tuition and all fees in accordance with the installment tuition and fee payment plan provided for by the Education Code, (Chapter 54, as amended) on or before the end of the 20th class day for each regular semester ....") (last visited Oct. 20, 2009); see also TEX. EDUC. CODE ANN. § 54.004 (Vernon 2006) ("All tuition, local funds, and fees collected by an institution of higher education shall be retained and expended by the institution and accounted for annually as provided in the general appropriations act.").]