Ed Money Watch

A Blog from New America's Federal Education Budget Project

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State Fiscal Stabilization Funds and Kentucky’s Loan Forgiveness Program

Published:  June 16, 2009

Two weeks ago, our sister blog Higher Ed Watch published a post uncovering the truth behind Kentucky's terminated teacher loan forgiveness program, "Best in Class." Although the Kentucky Higher Education Student Loan Corporation (KHESLC), the state's nonprofit student loan agency that administered the program, blamed federal subsidy cuts for the program's demise, Higher Ed Watch showed that the agency had engaged in questionable practices to collect these subsidies. Now, many Kentucky teachers enrolled in the program are in a financial bind and many stated their outrage in comments on the blog. One commenter suggested Kentucky use it's State Fiscal Stabilization Fund (SFSF) under the 2009 economic stimulus law to fund the program. Unfortunately, the structure of the SFSF makes this very unlikely.

As we have mentioned before, the $53.6 billion in SFSF Congress made available to states under the America Recovery and Reinvestment Act is actually comprised of three different programs. Each of these programs - the Race to the Top and What Works Innovation Fund, the Education Stabilization fund, and the Government Services fund - provide different funding levels for different purposes. (More information available here.)

States must submit applications to receive SFSF dollars for the Education Stabilization and Government Services funds in which they declare how much state and SFSF money they will spend on K-12 and higher education in fiscal years 2009 and 2010. The amount of money each state receives is determined based on the state's population age 5 to 24 and the total population. The Race to the Top and What Works Innovation Fund, on the other hand, are awarded through a separate competitive grant process.

Kentucky is slated to receive $532,797,583 in Education Stabilization funds and $118,544,206 in Government Services funds. Guidelines for the Education Stabilization fund, however, prevent Kentucky from using any of this money on a state operated financial aid program like "Best in Class." In fact, all dollars slated for K-12 school districts or public institutions of higher education must go directly to those entities and cannot be used by the state for any other purposes.

The Government Services fund is a possible source of SFSF funding for the loan forgiveness program. Luckily, Kentucky's governor has greater control over how this money is spent and can chose to direct some or all of it to save the loan forgiveness program. The state, however, has not yet submitted its SFSF application for Education Stabilization and Government Services funds, and it's hard to predict how these funds will be allocated. While it is possible that the governor could chose to save the loan forgiveness program with this money, it would mean leaving other activities eligible under the fund with fewer resources.

The Race to the Top funds, $4.4 billion of the $5.0 billion in competitive grant funds within the SFSF, are another possible, but less likely, source of funding for the loan forgiveness program. These funds can be awarded to states that are undertaking innovative initiatives to close student achievement gaps or improve the distribution of high quality teachers across schools. If Kentucky can demonstrate that the loan forgiveness program is achieving either of these goals, it could be eligible for a portion of the funds.

However, 49 other states, Puerto Rico, and the District of Columbia are all also competing for their piece of the Race to the Top funds and may have more successful or well-implemented programs than Kentucky's loan forgiveness program. Beyond that, the loan forgiveness program's association with the improper student loan subsidies (more on that here and here) already undermines its integrity.

Unfortunately, Kentucky's teacher loan forgiveness program is an unlikely target for SFSF support. It's likely that other services within Kentucky and across other states will receive funding instead. Hopefully, Kentucky can find another way to make good on its promise to teachers.

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