Audit findings fault state student loan commission.

Byline: GREG BOLT The Register-Guard

The state agency that administers student financial aid programs should repay more than $2 million it withheld from a federal reserve fund, a U.S. Department of Education audit concludes.

The Oregon Student Assistance Commission disagrees with the audit's conclusions, saying the money was principal and interest earned on state money that helped launch the student loan guarantee program more than 30 years ago. The agency plans to appeal the audit recommendation to the Education Department, director Jeff Svejcar said.

If forced to repay the money, OSAC would take a substantial hit in the portion of its budget that manages the student loan program. That could limit some of the services it offers to colleges and universities and reduce the number of staff who work with student borrowers.

"We absolutely, positively disagree" with the audit finding, said Bruce Marks, OSAC's deputy director. "It is definitely our position there were state of Oregon monies in that fund for the purpose of originating and operating the federal program."

The audit report will be forwarded to the Department of Education, which will make the final decision on whether to require OSAC to make the repayment.

OSAC is not challenging the audit's findings of less serious errors in other accounting practices, which will require an additional $185,000 transfer between funds.

The Education Department's Office of Inspector General conducted the audit to determine whether OSAC properly allocated almost $1.6 million in 1998 when the agency separated its federal funding into two accounts, an operating fund and a reserve fund, to comply with new federal regulations.

The operating fund pays OSAC's costs related to administration of the federal Family Education Loan Program, and the reserve fund is the main backing for the student loans guaranteed by OSAC.

Svejcar said the agency put the money in the operating fund rather than the reserve fund to recover state money that was used to start the student loan program in the mid-1960s. The original principal was less than $20,000, but interest over 30 years boosted the amount to almost $1.6 million, he said.

At the time the state money was deposited, the student loan program was operated from a single account that included reserve funds and operating funds. The dispute is over which fund the money belongs in.

OSAC provided budget documents showing that state funds had been used and laying out the compounded interest claim. It also had an independent accountant examine its documentation and provided those findings to the federal auditor.

But the auditor's report said OSAC failed to adequately show that state money had remained in the federal account continuously until it was split into two in 1998.

Also, it said that even if state money had been deposited in the account, all funds become federal property as soon as they are deposited in the federal account.

The report further said that OSAC did not follow proper procedure for claiming the money and said federal law does not allow state agencies to charge the federal government interest on state money deposited in the federal account.

But the federal government can make the state pay interest. In addition to the $1.6 million, the audit recommends charging $273,586 for interest accumulating from 1998 through the end of last year plus an additional amount from Jan. 1 through the time the money is paid.

The audit also found fault with several accounting practices generally dealing with how OSAC accounts for costs related to the federal loan program and the way certain other federal funds were handled.

The agency mostly acknowledged errors in those areas and said it already has made changes to fix the problem, but it will have to pay $185,000 from the operating fund to the federal reserve fund to correct past mistakes.

Linda Ames, a state budget analyst who works with OSAC, said that if the agency ultimately is required to pay back the money, it will mean more belt-tightening but won't significantly impair its ability to help students finance their college educations.

"It's not devastating, but it makes their budget a lot tighter," she said.

The dispute does not affect another major OSAC program that administers a variety of private scholarships. That program will help distribute $8 million in scholarship money this year.