                                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
