Last week I wrote about HB 1823, which would remove sustainability requirements from the yet-to-be-implemented Washington student loan program. (See that post for details about the 2022 legislation and how HB 1823 would change it.)

Instead of specifying program details, the 2022 legislation required the Washington Student Achievement Council (WSAC) to “design a student loan program to assist students who need additional financial support to obtain postsecondary education.” WSAC’s report “on the design, sustainability, and implementation plan for the program” was provided to the Legislature last month and has now been posted publicly.

Statute required WSAC to “contract with an independent actuary to conduct an analysis on the sustainability of the program design, including the ability of the program to operate as self-sustaining if issuing one percent interest rate loans” (RCW 28B.93.020). That was not done; nevertheless, the WSAC report raises questions about the sustainability of a state student loan program.

As part of its report, WSAC talked with national experts. They noted, “To have a sustainable loan program, when the sum of credit losses and administrative costs are subtracted from earnings, the net result must be positive.” Further, “Typically, administration and other costs of operation are about 1%. This means that all the interest gained in a 1% loan program would go toward costs. This would compel the program to achieve close to 0% credit losses, which is impossible to achieve.”

WSAC notes that Georgia has a need-based 1% loan program that is funded with $26 million a year in state appropriations. (The default rate is three times higher than federal loan default rate.)

In the 2022 legislation, the Legislature said it “intends to finance the Washington state student loan program with a one-time $150,000,000 appropriation to cover annual student loan originations and expenses until repayments are substantial enough to support the program on an ongoing basis” (RCW 28B.93.005). How realistic is that, given that all the interest would go toward costs and the potential for a high default rate?

Indeed, WSAC writes, “A 1% interest loan that is sustainable forever will need state appropriations consistently, or a capital contribution of $150 million would provide an annual lending amount in the low single digits of millions of dollars.” Annual lending in the low-seven figures wouldn’t go very far. Although HB 1823 would limit the loans to graduate students in high-demand fields, it’s easy to imagine that there would be an ongoing need for state appropriations to the program.

WSAC recommends that the Legislature provide “Clear identification of goals of the loan program that include defining self-sustainability, which could lead to solidifying other design elements geared toward decreasing or increasing borrower friendliness.”

For example, WSAC writes, “The design elements will be a lot more borrower-friendly if self-sustainability is redefined as a target life cycle of the fund for 5-10 years.” HB 1823 is apparently getting at this by adding that the student loan account “have a minimum life cycle of seven years.”

But HB 1823 doesn’t redefine self-sustainability, it just removes all sustainability requirements. The WSAC report raises serious concerns about sustainability and suggests that ongoing state spending could be necessary. HB 1823 was approved by the House Appropriations Committee on Feb. 24. If the Legislature insists on moving forward with this program, it should still require a pre-implementation actuarial analysis of the program.