Since its creation in 1965, the Vermont Student Assistance Corporation has made itself an indispensable college prep resource for students, parents and lawmakers by offering everything from counseling — starting in middle school — to scholarships, grants and loans.

But in 2009 the public nonprofit has been hit with a double whammy: The financial market meltdown has made it harder to sell the bonds that guarantee its loans; meanwhile, pending federal legislation threatens to cut VSAC out of the student loan business altogether.

The idea that VSAC could fail should alarm parents and students alike. But it’s a possibility Vermonters may not be able to ignore.

VSAC was founded to be the in-state conduit for the Federal Family Education Loan program, also established in 1965. FFEL uses both private lenders and public nonprofits like VSAC to guarantee, finance and service education loans.

Twenty-nine years later, in 1994, the feds created the Federal Direct Loan Program, which provides the same FFEL loans directly to students through the colleges they attend. The FDLP program, as it’s called, is not set up to service the loans, so the federal government contracts with private vendors.

The goal of the current federal legislation is to cut out the so-called “middlemen” in the student loan business — including nonprofits like VSAC — so parents and students borrow money directly from the federal government. In brief, Obama’s proposal would eliminate FFEL and force all students to get student loans through the FDLP.

Supporters tout the proposal as a measure that would reduce waste in the lending process and increase efficiency. Scott Giles, VSAC’s vice president for policy, research and planning, acknowledges that if Congress approves the Obama proposal, a far slimmer VSAC will emerge — one perhaps a third of its current size. “It would be a dramatically different organization if we were only around to service our existing loans,” says Giles.

But that would be a serious loss for Vermont families that see VSAC as more than a source of red tape. “They came right into the community and provided a lot of information and support for a lot of families, as well as training for counselors in the schools,” says Rose Pelchuck of Calais.

“We were just scared to death of our kids going off to college. How were we going to pay for it? we wondered,” recalls the registered dietician at Central Vermont Medical Center. “We’re working-class people who weren’t fortunate enough to have a trust fund or inheritance to pay for college debt.”

Pelchuck’s two kids made it through the process: One is now a senior at Lyndon State College, while the other is a junior at Johnson State. Pelchuck says VSAC’s College Pathways seminars were instrumental in helping her family get a workable financial-aid plan. “It’s just ridiculous that the government thinks there is a one-size-fits-all approach that can help people find their way through this complicated maze of paying for college,” she says.

Itself a creation of the state, VSAC was originally designed to give Vermont students access to federal and private college loans. Since 1965, it has expanded to offer financial aid and college prep counseling to parents and students. That counseling has become more important as many middle and high school guidance counselors shift their attention from encouraging post-secondary pursuits to dealing with crisis intervention and family matters.

“Over the years, we’ve found ourselves taking on more of a [academic] counseling role as many school counselors are doing just that — counseling. But they are not providing the kind of career counseling and college prep that we do,” said Irene Racz, VSAC’s spokeswoman.

The Pelchucks are among nearly half a million Vermonters who have been served by VSAC since its outreach program was launched with just two people in 1969. It now has more than 40 counselors among its more than 350 employees. Almost all of them are housed in VSAC’s spacious 122,000-square-foot headquarters in Winooski.

The outreach and counseling work — which VSAC provides without charge to colleges, high schools and state offices — costs $8 to $10 million annually, says Giles. VSAC does not charge for these services because the organization makes enough money servicing $2.3 billion in outstanding student loans to cover the costs, he adds. In fiscal year 2008, VSAC loaned $477 million to students and parents.

According to its audited financial statements, VSAC earned $142 million from interest alone in FY 2008 — roughly 6 percent on the $2.3 billion — down from $147 million in FY 2007. Its total revenues were $185 million in FY 2008 and $192 million in FY 2007.

Besides doing outreach work, VSAC administers a roughly $20 million low-income scholarship program for the state and oversees the Vermont Higher Education Investment Plan — an IRS-approved, tax-deferred college savings plan. Again, at no direct cost to taxpayers, notes Giles.

If Congress goes along with the president’s proposal, Vermonters could be forced to decide how to pay for these programs, and whom to pay to oversee them. With deficits projected for each of the next two fiscal years, that could be a tall order, and it would pit VSAC against many other state-funded programs and services.

In the interim, VSAC has been trimming costs. VSAC officials say about 40 jobs have already been cut through attrition, and the organization slashed its overall expenses by 8 percent in FY 2009 and another 5 percent in FY 2010.

Despite VSAC’s nonprofit status, however, its top managers earn what many Vermonters would consider hefty salaries. President and Chief Executive Officer Don Vickers takes home nearly $225,000, while his four vice presidents earn an average of $152,000 each. By comparison, this year Vermont Governor Jim Douglas will earn roughly $142,500, after taking a 5 percent pay cut from his normal $150,000.

VSAC has always been a favored stepchild of the state. That was evident this past session when lawmakers agreed — with only slight dissent — to pledge a “moral obligation” of $50 million to back VSAC loans this year.

No doubt it helps VSAC’s cause at the Statehouse that, by statute, lawmakers are required to serve on its board. The current legislative appointees are House Appropriations Committee Chairwoman Rep. Martha Heath (D-Westford) and Senate Finance Committee Chairwoman Sen. Ann Cummings (D-Washington). The state treasurer sits on the board as well, and the governor appoints five more members.

“We haven’t had to call that $50 million obligation in, and we don’t expect to,” said Giles. The state pledge acts as a backstop, allowing VSAC to offer assurance to potential investors that it can repay the bonds it sells to raise money to provide student loans. With state aid as a last resort, Giles says, VSAC doesn’t need to put up as much of its own reserves and assets as collateral.

Earlier this year, VSAC partnered with KeyBank to ensure that bond holders could cash out of their long-term bond obligations if they chose. That was a big selling point to investors, many of whom may not want to keep bonds tied up in funds for 30 years — especially in these fluctuating markets. KeyBank has balked at doing this again, so VSAC is selling its bonds through the U.S. Department of Education’s “conduit” program, which bundles education bonds and sells them to investors.

But the conduit program may not survive this year, notes Giles. If Congress approves the Obama plan, it could be eliminated. VSAC would be forced to find another KeyBank arrangement or refinance some of its debt to stay alive, says Giles.

VSAC has one key ally in the Senate: Sen. Bernie Sanders (I-VT), who sits on the Senate Health, Education, Labor and Pensions Committee that is evaluating Obama’s proposal. “It is my belief that the Senate can craft legislation that creates savings that would both increase Pell Grants and carve out funding for VSAC and other state nonprofits so they can continue offering the important counseling and assistance they have provided to generations of students,” says Sanders.

One VSAC observer — Manchester bond broker Michael Gardner — hopes the legislature doesn’t prop up VSAC with taxpayer dollars if the nonprofit falters. In a post on the conservative-leaning blog Vermont Tiger last November, Gardner warned that the pending credit market crisis could sink VSAC and leave Vermont taxpayers footing the bill for a variety of services — draining already depleted state coffers.

But Giles says that, beyond the $50 million in moral obligation support, taxpayers aren’t on the hook if VSAC falters. Unlike state colleges and the University of Vermont, it receives no direct state funding to cover expenses.

The work that VSAC puts into servicing its loans has a significant payoff: VSAC’s default rate is among the lowest in the nation: less than 3 percent. The national average is around 7 percent. That means there’s less risk to investors who buy VSAC bonds. Moreover, the federal government backs all student loans up to 97 percent of their value. VSAC purchases bond insurance as an additional guarantee that bond holders will get their money and pledges its own reserves to cover any losses, says Giles.

Still, borrowing directly from the federal government may be a more cost-effective alternative for Vermont students and parents, says Gardner, especially if VSAC continues to struggle. “My point is that VSAC is just not a sustainable business model right now at this point,” he says, noting the new restrictions on bonds limits how much money VSAC can loan. “How are they going to be able to glean enough money from their business to cover administrative expenses? I fear they are going to turn to the legislature, and they, in turn, will declare [VSAC] a sacred cow.”

Pelchuck, however, sees a frightening prospect on the horizon if VSAC is eliminated: Students will be left to prepare themselves for college without one-on-one counseling, and they’ll be the ones dealing with out-of-state lenders if problems arise. Will school counselors be equipped to pick up the slack? Not without VSAC’s outreach and training, she believes.

“What are we going to be stuck with — something like FairPoint?” Pelchuck asks, referring to Vermonters’ notorious travails with the out-of-state telecommunications company. “Look at FairPoint — you can’t get anyone on the phone if you have a problem or a question, and that’s what I fear most if the government bypasses VSAC and chooses some other company.”

For some Vermonters, it seems, “borrow local” is as strong a rallying cry as “buy local.”