H.R. 6, THE HIGHER EDUCATION AMENDMENTS OF 1998, STUDENT LOAN PROGRAMS
SUBCOMMITTEE ON POSTSECONDARY EDUCATION,
TRAINING AND LIFE-LONG LEARNING
COMMITTEE ON EDUCATION AND
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
HEARING HELD IN WASHINGTON, DC, JULY 22, 1997
Serial No. 105-115
Printed for the use of the Committee on Education
and the Workforce
H.R. 6, THE HIGHER EDUCATION AMENDMENTS OF 1998
STUDENT LOAN PROGRAMS
STATEMENT OF DR. DAVID LONGANECKER, ASSISTANT SECRETARY, U.S. DEPARTMENT OF EDUCATION, WASHINGTON, D.C. *
STATEMENT OF MR. WILLIAM LEITH, DIRECTOR OF STUDENT FINANCIAL AID, UNIVERSITY OF MARYLAND, COLLEGE PARK, MARYLAND *
STATEMENT OF MS. CHERYL STORIE, DIRECTOR OF STUDENT FINANCIAL AID, THE AMERICAN UNIVERSITY, WASHINGTON, D.C. *
STATEMENT OF MR. PAUL S. TONE, SENIOR VICE PRESIDENT, UNIPAC SERVICE CORPORATION, AURORA, COLORADO *
STATEMENT OF DR. FITZGERALD, ON BEHALF OF MS. LOLA J. FINCH, VICE CHAIRPERSON, ADVISORY COMMITTEE ON STUDENT FINANCIAL ASSISTANCE, WASHINGTON, D.C. AND DIRECTOR OF FINANCIAL AID-EMERITUS, WASHINGTON STATE UNIVERSITY, PULLMAN, WASHINGTON *
Appendix A – THE OPENING STATEMENT OF THE HONORABLE HOWARD P. "BUCK" McKEON, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA *
Appendix B – THE WRITTEN STATEMENT OF DR. DAVID LONGANECKER, ASSISTANT SECRETARY, U.S. DEPARTMENT OF EDUCATION, WASHINGTON, D.C. *
Appendix C – THE WRITTEN STATEMENT OF MR. WILLIAM LEITH, DIRECTOR OF STUDENT FINANCIAL AID, UNIVERSITY OF MARYLAND, COLLEGE PARK, MARYLAND *
Appendix D – THE WRITTEN STATEMENT OF MS. CHERYL STORIE, DIRECTOR OF STUDENT FINANCIAL AID, THE AMERICAN UNIVERSITY, WASHINGTON, D.C. *
Appendix E – THE WRITTEN STATEMENT OF MR. PAUL S. TONE, SENIOR VICE PRESIDENT, UNIPAC SERVICE CORPORATION, AURORA, COLORADO *
Appendix F – THE WRITTEN TESTIMONY OF MS. LOLA J. FINCH, VICE CHAIRPERSON, ADVISORY COMMITTEE ON STUDENT FINANCIAL ASSISTANCE AND DIRECTOR OF FINANCIAL AID-EMERITUS, WASHINGTON STATE UNIVERSITY, PULLMAN, WASHINGTON *
Appendix G – THE WRITTEN TESTIMONY OF THE HONORABLE RON KLINK, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF PENNSYLVANIA *
Table of Indexes 140Tuesday, July 22, 1997
House of Representatives
Subcommittee on Postsecondary Education, Training and Life-Long Learning
Committee on Education and the Workforce
The subcommittee met, pursuant to call, at 9:30 a.m., in Room 2175, Rayburn House Office Building, Hon. Howard P. "Buck" McKeon [chairman of the subcommittee] presiding.
Present: Representatives McKeon, Roukema, Barrett, Kildee, Roemer, Woolsey, McCarthy, and Ford.
Staff Present: George Conant, Majority Professional Staff Member; Sally Stroup, Majority Professional Staff Member; Pamela Davidson, Majority Legislative Assistant; Mark Brenner, Majority Professional Staff Member; Marshall Grigsby, Minority Senior Legislative Associate; and David Evans, Minority Legislative Associate.
Chairman McKeon. Good morning. I would like to welcome the witnesses who have agreed to appear before us this morning.
Today we will hold another of a series of several program-specific hearings here in Washington, D.C., to bring together experts from across the country and hear their views on the Higher Education Act. Let me take a moment to describe how I see higher education in the future.
I would hope that men and women, young and old, will have access to postsecondary education when they need it. Some would go to college for undergraduate or graduate degrees, others would choose to go to school or go back to school for much shorter periods of time in order to improve or upgrade their skills for a better job and a better future. Many could just take a class or two from home over the Internet. But I want to see every American who so chooses to have the option of receiving a quality education at an affordable price.
This subcommittee has jurisdiction over the Higher Education Act. We have a great deal of work ahead of us. As many of you know, the Higher Education Act is scheduled for reauthorization during the 105th Congress, and in general terms, this means the committee will be making determinations as to the effectiveness of the existing programs, as well as the need for programmatic changes which address specific problem areas.
One of our primary focuses throughout the entire process is keeping college affordable for students and families. We have all heard the concerns of parents and students who are worried about increasing college prices and the student loan burden many are facing as a result. As a parent of six children, two of whom are currently enrolled in college and a few others, paying off student loans, I am well aware of what it costs a family to pay the college bills. I am also committed to making college more affordable.
Our job this Congress is to improve on what is already working for students across the country, eliminate programs which are not working, and do it all in a way that ensures the precious taxpayer dollars are spent wisely. As we reauthorize the Higher Education Act, our goals will be making higher education more affordable, simplifying the student aid system, and stressing academic quality. If we stay true to these principles, we can improve what is already working for students and families across the country.
Today's hearing will focus on the federal student loan programs. The Department of Education operates two major student loan programs. The Federal Family Education Loan Program, or FFELP, and the William D. Ford direct loan program. Together, these two programs provided $30 billion in loans to students during the 1996 fiscal year. Both provide subsidized Stafford loans to students based on financial need; unsubsidized Stafford loans, which are available to all students regardless of income; Plus loans which help parents finance higher education for dependent, undergraduate students, and consolidation loans, which allow borrowers to combine their student loan payments.
The terms and conditions of loans made under these two programs are similar, but not identical. Under the FFELP program, the federal government insures and subsidizes loans made by private lenders to parents and students for a postsecondary education. The FFELP program provided about $19 billion in 1996 and currently accounts for two-thirds of all federal student lending.
Under the William D. Ford Direct Loan program, parents and students borrow directly from the federal government and apply it through their schools. Parents and students borrowed approximately $11 billion in the Direct Loan program in 1996, and Direct Lending correctly provides roughly a third of the federal loan capital available.
Our witnesses all have hands-on experience with these programs. They have the responsibility for making certain that our federal student loan programs function smoothly and that our students have access to the financial help they need to pursue a postsecondary education. They are the true experts on higher education, and I look forward to hearing from them today.
See Appendix A for the Opening Statement of the Hon. Howard P. "Buck" McKeon
Mr. Kildee. Thank you very much, Mr. Chairman. I had three children in college at the same time and I understand the situation. As a matter of fact, one of them got married this Saturday and is now in Portugal. When I got married, for someone to go to Detroit was a long way to go on a honeymoon.
I would like to, first of all, call attention to the fact that some people who have been involved in education for a long time are in the audience today: Sara Davis, who was on my staff; and Pat Risler, who was Chief of Staff for Bill Ford; Beth Buehlemann, who worked for Mr. Goodling, worked very hard on these programs; and Tom Butts from the University of Michigan, where I got my Master's Degree. I see them scattered throughout the audience, and I appreciate all they have done throughout the years in these programs.
Mr. Chairman, as you know, I have been a staunch advocate of the Direct Loan program. I thought it was a very good idea when it was proposed, and it has been a very good program since it began. I talk to Bill Ford from time to time and this program is one of his greatest achievements and one he is very proud of. It has provided a good service for students and institutions.
The Direct Loan program, Mr. Chairman, has also produced a side benefit, quite frankly, we had not anticipated when it went into operation. Its presence as a competitor has brought about improvements in the FFEL program that simply were not possible when the FFEL program was the only loan game in town. Today, the FFEL program provides better services to students and schools, and I believe we can thank the Direct Loan program for that accomplishment. In the field hearings, we heard time and time again that we should keep both programs in place and not sacrifice one program in favor of the other. I believe that was good advice.
Mr. Chairman, I know that we both want to avoid the very partisan differences that erupted over Direct Lending during the last Congress. You and I have had many, many discussions on that, and I know we are committed to that. We are also deeply committed to making sure this reauthorization is truly bipartisan.
To that end, we want to keep differences of opinion regarding the loan programs from becoming a deeply divisive issue. We have agreed that the mix between direct and FFEL loans ought to be about what it is in current law and that we will work together to that end. This does not mean we will be unwilling to make changes in either program; quite to the contrary, I believe we are very willing to make changes that would improve both programs in terms of the services and benefits.
To my mind, our goal should be to provide students and their families with the loan capital they need in a user-friendly manner at the lowest possible cost. We may not be able to accomplish all that we want to, but that should be certainly our driving force behind our efforts.
Mr. Chairman, I look forward to the testimony we will receive today.
Chairman McKeon. Thank you very much.
We are happy to have with us Dr. David Longanecker, Assistant Secretary, U.S. Department of Education, representing the Secretary here. We appreciate having you. We will begin with Dr. Longanecker.
Then we will hear from William Leith, Director of Student Financial Aid, University of Maryland, College Park, in College Park, Maryland; then Ms. Cheryl Storie, Director of Student Financial Aid at the American University in Washington, D.C.; Mr. Paul Tone, Senior Vice President, Industry and Government Relations, Unipac Service Corporation, Aurora, Colorado. Boy, that is a real sacrifice, being here today from Aurora, Colorado. I have been there.
Mr. Tone. You are welcome to come back.
Chairman McKeon. It is a beautiful place.
Finally, Dr. Brian Fitzgerald, Staff Director of Student Financial Assistance in Washington, D.C.
First, Dr. Longanecker, please.
STATEMENT OF DR. DAVID LONGANECKER, ASSISTANT SECRETARY, U.S. DEPARTMENT OF EDUCATION, WASHINGTON, D.C.
Mr. Longanecker. Thank you, Mr. Chairman, Mr. Kildee. It is a pleasure to be here today. I thank you very much for those opening comments. Those are remarkably strong comments from both of you, ones with which the Administration would associate themselves easily.
I would ask the full text of my prepared testimony be entered into the record, and I will offer abbreviated remarks here today.
The Administration's student loan proposals fit intentionally within a comprehensive, integrated vision for postsecondary education that is reflected in initiatives in three policy arena; the tax arena, the budget arena, and the authorizing arena. And to understand our proposals, one really needs to look at the overall comprehensive fit, which we think is sound.
Of course, they fit within the context of a balanced budget by the year 2002. Our student loan reauthorization proposals for the most part were reflected in our fiscal year 1998 budget, and although they have not been included, by and large, in the budget reconciliation, we continue to believe that they are very good ideas and will be asking you to reconsider most of them in reauthorization. As you no doubt know, we remain very keen on Direct Lending, which is living up to all of our expectations, providing strong service to schools, saving taxpayers' dollars, and most importantly, providing exceptional benefits to students including, I might add, access to the income contingent loan program, which despite some naysayers is a very valuable repayment option for many borrowers.
Not only that, success has spawned substantial improvement, as mentioned, in the FFEL program, essentially revolutionizing the student loan industry over the last 3 years. In just those 3 years, the program has garnered one-third of the student loan business, providing almost $10 billion annually. In the private sector, any start-up company that captured a share of the market of a mature industry, in 3 years would be considered a remarkable success, and that is precisely what Direct Lending is. So, in reauthorization, we are pursuing only a few changes we need to improve this program and to ensure it is given a fair chance to continue its remarkable success.
What we are proposing begins with a focus on the students. We have proposed reducing the loan origination and guaranty agency fees for subsidized loans from 4 to 2 percent, for unsubsidized loans from 4 to 3 percent, and we would like to do more than that if the budget allows.
We have also proposed to extend most of the Direct Loan repayment options to FFEL program borrowers to improve borrowers' terms for FFEL consolidation, to lower interest rates for students, and to prohibit lenders and guarantors from offering different loan terms to privileged classes of borrowers.
Let me say a little more about the last point. Today, some lenders and some guaranty agencies are offering price discounts, either out of federal reserves or out of excess profits, to certain groups of students. This is clearly unfair to the students not offered those benefits, which, of course, includes every student in the Direct Student Loan program because, by statute, that program cannot offer such inducements. Competing on quality of service is one thing, but providing a cost competitive advantage to one program to benefit some privileged borrowers within that program at federal expense simply makes no sense, and it isn't fair.
With respect to management of the guaranty agencies, we proposed an improved management subsidy structure that would reduce regulation, improve guaranty agency performance and reduce costs to taxpayers. What we propose is the guaranty agencies be provided a fee, a fee that would be sufficient to support quality service from quality providers. These changes would create fair treatment for the two programs and a leaner, more defensible future for the FFEL program.
But what we have to do is more than just improve the student loan programs; we also have to improve the delivery of student financial aid at large. We simply must improve the way in which we deliver student financial aid. We have to reduce the burden on schools, we have to make the process of receiving aid easier and more easily understood by students and their families.
To this end, we have engaged in Project EASI, which is creating an electronic, student-centered delivery system from application through delivery of aid through the repayment of student loans. It would be a lot easier, however, to simplify a delivery if we had a simpler policy and a simpler array of programs; and we will be asking you to help us move forward such a world in reauthorization.
So, Mr. Chairman, our perspective on student loans is, we made a lot of progress over the last 4 years, particularly with the advent of Direct Lending, but we still have work to do to make the system more fair, more effective and less expensive; and we look forward to working with you toward that, and I will look forward to your questions later.
Chairman McKeon. Thank you very much.
See Appendix B for the Written Statement of Dr. David Longanecker
Chairman McKeon. Mr. Leith.
STATEMENT OF MR. WILLIAM LEITH, DIRECTOR OF STUDENT FINANCIAL AID, UNIVERSITY OF MARYLAND, COLLEGE PARK, MARYLAND
Mr. Leith. Thank you, Mr. Chairman, members of the subcommittee.
First of all, as background, the University of Maryland enrolls about 33,000 students at the undergraduate, graduate and doctoral levels. For the upcoming school year, we will have about 13,000 students borrowing federal loans of approximately $70 million, and that includes the subsidized and unsubsidized and parent loan programs.
Over the past, I would say, 3 to 4 years at the University of Maryland, the FFELP process has gotten considerably better. The process works for us, and it continues to improve; and I would agree wholeheartedly, the number one reason for that improvement is the advent of the Direct Loan program. I also think the competition that is inherent between the lenders and the guaranty agencies that want to do business with our students increases the level of service that is available to our students.
Specifically, to cite some specific examples over the past couple years, the loan volume at our institution has increased substantially; the amount of resources we have had to put into processing loans has not increased at all, so there is an opportunity to achieve cost savings there. That has been deployed in other areas of the office to meet other needs of our students.
The primary reason for these cost savings is due to the standardization and the processes within the FFELP program that have taken place. There has been a standardized format for transmitting files to guaranty agencies and receiving funds via EFT, electronic funds transfer, from banks or other disbursing agents. About 95 percent of our loans go through this standard process, which allows our students to choose a lender of their choice, based on other service factors, and still allows us to realize economies of scale in processing.
I think that the service that the lending community is now providing is also excellent. I think that the one distinguishing factor, given the regulatory aspects of the student loan industry, the one distinguishing factor that lenders can differentiate themselves on is customer service, and to that end, the students benefit, they have access to top-quality professional service at all levels of the process.
Lastly, I think our students are benefiting from interest rate incentives that are available to them once they go into repayment. At our university, it is not based on class as much as it is based on student performance in paying back their loans. A number of lenders and holders of loans offer interest rate reductions to those students that pay their loans on time over a certain amount of years, and also they will offer an interest rate reduction if they pay their loans electronically.
So, as I say, the process works well.
I think there are some processes that certainly could be enhanced to simplify the process, and briefly I would like to go over a few of those. I think, primarily, there is a separate loan application required under the FFELP program, application and promissory note, and this causes some confusion among our students; the application process itself has a high error rate. When a student makes an error on the loan application, it certainly delays the process for the student. I would recommend that we look at using the free application for federal student aid to the extent possible to capture the data that is on the student loan application with the intent to possibly limit or severely restrict the reporting requirements on the loan application.
The certification process for student loans also can be somewhat cumbersome and requires us to not only submit the student's loan eligibility but also supporting documentation to the guaranty agency. This process, in itself, can cause errors; and I would like to see us look at ways in which we could either eliminate that or simplify the process for certifying the student loan, perhaps just certifying the amount of the loan and the student's eligibility. All background information is available at the institution.
Lastly, I guess the one issue I think does need to be addressed is, there has been a lot of standardization within the FFELP process. It has been voluntary. We have about 5 percent of our students that do choose a lender that chooses not to participate in one of these standardized processes. This 5 percent means that we have staff dedicated to processing loans manually; we get checks in from these lenders, and it diverts resources to those students. I would like to see us evolve to a fully integrated system in which everybody participates. That is it.
I think, in closing, that the program works well, that there are some processes that could be enhanced to simplify the process, making life easier for our students and the institutions.
I would be happy to take any questions later. Thank you.
Chairman McKeon. Thank you.
See Appendix C for the Written Statement of Mr. William Leith
Chairman McKeon. Ms. Storie.
STATEMENT OF MS. CHERYL STORIE, DIRECTOR OF STUDENT FINANCIAL AID, THE AMERICAN UNIVERSITY, WASHINGTON, D.C.
Ms. Storie. Mr. Chairman, members of the committee, thank you for the opportunity to speak before you today. When I came to American University 2 years ago, I was somewhat skeptical, I must admit, of its status as one of the original 104 Direct Lending schools. However, let me begin by telling you, at American University, the Direct Loan program, with an annual volume of over $435 million, has simplified the application process, speeded up the delivery of funds, eliminated student lines during registration and reduced visits to the financial aid office. The university has benefited by the reduction in paperwork, spent less time on tracking issues and there is an overall improvement in the aid delivery process.
The conversion from FFELP to Direct Lending at American allowed several financial aid office staff to be reassigned from paper-intensive loan processors to student-intensive financial aid counselors. There are areas, however, in which I believe the Direct Loan program could be strengthened.
I believe the time has come during this reauthorization period to spend our energies allowing the two programs to truly coexist. There are five areas I would briefly like to address. First, incentives for consistent, on-time loan repayment. A critical difference between FFELP and Direct Lending is that of the interest rate discount for students who repay their loans on a timely and consistent schedule. This difference that affects students directly and unfairly. With the continued concerns about rising levels of student indebtedness, it seems this type of incentive, offered consistently to both FFELP and Direct Loan borrowers, will help the student in his or her postgraduate life-style and indicate to future borrowers that you don't have to mortgage your future in order to obtain a postsecondary education.
Second, ability to offer lower up-front fees or interest rates. Currently, FFELP lenders and guarantors have the ability to offer borrowers lower origination and insurance premiums or offer reduced interest rates. As these incentives are very positive and benefit the student both at the time of borrowing and at repayment, I believe they should be available in both programs.
Third, elimination of the origination fee. A most positive solution to the issue I just mentioned would be to eliminate or greatly reduce the origination fee entirely in both the Direct Loan and FFELP programs. Reducing the amount of money the student receives at the time of borrowing is a handicap to the student. Not only is the student sacrificing the money up front, but he or she is paying interest over several years on money they never benefited from using.
Fourth, retain the $10 per borrower fee. It is important to retain the program fee of $10 per borrower which reimburses the institutions that originate loans, to assist them in paying for the start-up and ongoing costs of administering the Direct Loan program. The increased use of technology required by Direct Lending has been a very positive influence on American University; however, not all postsecondary institutions have the necessary computer support available to them on their campus and the cost of equipment can be substantial. Much like the lender subsidies in the FFEL program, the $10 program fee assists in offsetting these necessary costs.
Fifth, prohibit a cap on the Direct Lending program. In order for institutions to be able to make a free and clear choice as to which loan program to participate in for its students, the free market concept must continue. Schools should have the freedom to decide which program best meets the needs of its students.
I would now like to address some issues related to the simplification of the aid application process. Recent technological advancements have had a substantial effect on the ease with which students are able to apply for financial aid. The following are some additional recommendations.
First, acceptance of electronic signatures. One hindrance to the recent technological advancements is the continued requirement for printing a signature page, signing it and mailing it to the FAFSA contractor before the application is considered complete. The time has come to allow for electronic signatures and certifications.
Two, increased regulatory relief. Not only should the aid process be simpler for the student, it should be simpler for schools to administer and explain to families. A review of existing regulations should be conducted with the goals of eliminating inconsistencies, loosening constraints on federal aid eligibility, reducing the complexity of the aid programs and focusing on improvements and the efficiency of the financial aid delivery system.
Finally, encourage use of technology and other aspects of federal financial aid. The current statutory requirements on information dissemination are very prescriptive in nature. The current realities of technology make electronic means of sharing information much simpler and quicker than traditional paper means. Activities such as loan entrance and exit counseling are prime targets for a move to technological base.
I encourage your careful consideration of these and other options to continue the positive advancement made in recent years toward a fair and simplified way of assisting students in funding their postsecondary education.
Thank you for the opportunity to make these comments, and I would be pleased to respond to any questions.
Chairman McKeon. Thank you very much.
See Appendix D for the Written Statement of Ms. Cheryl Storie
Chairman McKeon. Mr. Tone.
STATEMENT OF MR. PAUL S. TONE, SENIOR VICE PRESIDENT, UNIPAC SERVICE CORPORATION, AURORA, COLORADO
Mr. Tone. Mr. Chairman, members of the committee, in addition to being Senior Vice President of Unipac Service Corporation, I am also the immediate past President of the Student Loan Servicing Alliance. It is my pleasure today to represent the Alliance of the National Council of Higher Education Loan Programs, the Consumer Bankers Association, the Coalition for Student Loan Reform and Sallie Mae.
As you might guess, our organizations remain strongly supportive of the FFELP program. The FFELP program has had an amazing success in its 30-year history by making approximately $225 billion available to students and their families. We believe that the adaptability of the unique public-private partnership that is the FFELP program has and will continue to serve students and their families well.
We have many good ideas to simplify the application and other processes for students and to make FFELP more efficient through the use of technology, simplified regulation, and cooperative community efforts. We are also very pleased with the changes that have occurred with FFELP in the last few years.
First, we are delighted with the dramatic reduction in default rates; however, default and the potential for default continue to challenge us, particularly as average loan amounts increase. As a result, we are proposing changes which will mitigate the potential for defaults. We are suggesting extended repayment terms and more flexible repayment options for borrowers. Among other things, we are suggesting deferment and forbearance processing be simplified. Those suggestions reflect both our experience, as well as the possibilities due to new technologies.
Our organizations have invested heavily in new technologies, and we expect to continue to invest in those technologies to simplify both the application and the administrative processes for students. In that regard, our use of new technology has occurred within the boundaries of legislation and regulation which did not anticipate dramatic technological advances. Legislation and regulation presume that processes and procedures are structured around paper or document processing, rather than electronic communication. As a result, we are proposing language that acknowledges the potential for change and encourages the use of new technology, and precludes regulations that impose artificial boundaries on new technology. Such changes will permit us to continue to simplify the processes for students and colleges.
The new technologies have reduced our costs. In that regard, we are delighted to have been able to pass some of the costs on to borrowers in the form of borrower benefit programs. For example, in my home State of Colorado, the Colorado Student Obligation Bond Authority does provide reduced interest rate to borrowers who make on-time payments. In addition, they provide additional incentives to borrowers who use electronic payment means. In effect, we are rewarding positive borrower behavior.
New technologies in concert with FFELP's efforts to simplify and continually build a better mousetrap have also prompted cooperative efforts. NCHELP's CommonLine provides colleges with a standard electronic format which permits colleges to communicate with any number of lenders and guaranty agencies as if they were one. The National Student Loan Clearinghouse provides schools with a single repository of student enrollment data.
ELM Resources provides unique tools for schools to manage student loan delivery. A common manual provides lenders and schools with a single source for policy guidance.
The FFELP industry has extensively used the World Wide Web to bring counseling and borrower-controlled electronic interaction to student loan programs.
Although we are very enthusiastic about the FFELP and its future, we are concerned about current language which provides for a change in the indexing of interest rates on loans made on or after July 1, 1998. Currently, interest rates for student loans are determined by the 91-day T-Bills. The change to take place July of 1998 will cause student loan interest rates to be indexed off the 10-year T-Bond rates.
The fundamental flaw with the 10-year index is its volatility as compared to the funding sources for student loans. The 10-year index changes more dramatically than the 90-day index, thereby causing lender yields to fluctuate more than can be accommodated in their financings.
Ironically, the historical cost to borrowers over the last 15 years was less under the 91-day T-Bill index than it would have been under the 10-year index. However, CBO has projected lower interest cost to borrowers using the 10-year index over the 5 years of the budget, and as a result, there are projected savings to the federal government if the 10-year index is repealed. We believe these savings should be passed on to borrowers.
In conclusion, we do not believe that FFELP needs major revision, we do believe it needs modernization. We are looking forward to working with the committee as it considers changes to the Higher Education Act.
Chairman McKeon. Thank you very much.
See Appendix E for the Written Statement of Mr. Paul Tone
Chairman McKeon. Dr. Fitzgerald.
STATEMENT OF DR. FITZGERALD, ON BEHALF OF MS. LOLA J. FINCH, VICE CHAIRPERSON, ADVISORY COMMITTEE ON STUDENT FINANCIAL ASSISTANCE, WASHINGTON, D.C. AND DIRECTOR OF FINANCIAL AID-EMERITUS, WASHINGTON STATE UNIVERSITY, PULLMAN, WASHINGTON
Mr. Fitzgerald. Thank you, Mr. Chairman, members of the subcommittee. On behalf of Lola Finch, our vice chair, who could not be with us today due to illness, and Advisory Committee members, I would like to thank you for the opportunity to testify at this hearing.
The Committee was created by Congress in 1986 to advise both the Congress and the Secretary on student financial aid policy. Let me begin by saying the Advisory Committee sent its recommendations to improve both loan programs to Congress and the Secretary on May 1, based on 4 years of evaluation of the loan programs, at the direction of Congress. These recommendations are attached to the written testimony. The Committee has recommended both programs continue to exist and healthy competition to improve services.
I would like to focus today on one particular Advisory Committee recommendation, aimed at the goal mentioned in your letter of invitation, simplifying the aid application process for students and parents. The recommendation to which I am referring is the use of the FAFSA as the loan application.
This proposal has unanimous community support because it would further simplify the aid application process for students and institutions across the country. In doing so, it would also help achieve another goal, which is most important to the Advisory Committee and certainly to Congress, maintaining access for low-income students. My remarks today will be aimed at explaining why the FAFSA proposal has unanimous support and how certain changes could undermine that support very quickly.
Mr. Chairman, great progress has been made over the last 5 years in simplifying and integrating the aid application and eligibility determination process, and I would hasten to add that this progress has made it much easier to strive toward the goal of access to postsecondary education for low-income students. Because of the hard work of Congress and the Department over the last decade, we now have in place a federal delivery system with one free application used by nine million applicants in almost every State in the Union, one reasonably concise federal data set that meets the needs of most providers of need-based aid; federal, state and institutional, one eligibility standard used by most providers of need-based aid, including many private institutions for their own funds, an adequate targeting of need-based aid and relatively uniform eligibility and awards in federal programs.
In sum, we have achieved a national application for all types of aid and a national eligibility standard, something the higher education community has sought for 2 decades. Only 5 years ago students, parents and institutions labored under a hugely burdensome system that had little face validity and, most critically, was an important barrier to access. I suggest the primary reason there is universal support now for using FAFSA as the loan application is that we have put most of this confusion behind us.
But the advantages of the current system could quickly disappear if the FAFSA were changed significantly into a form that cannot meet the needs of institutions and states. If that happens, all advantages of the FAFSA and the federal delivery system will disappear. In addition, Project EASI, the Department's modernization initiative, which is predicated on a national application, would be undermined.
One such change that would cripple the FAFSA as the centerpiece of the federal delivery system and Project EASI is the removal of data elements required by states to deliver their own need-based aid. A conscious decision by Congress in 1992 to include state data elements on the FAFSA was perhaps the most important single step in reducing burden on students and institutions. Thirty-three state supplements, multiple eligibility tests, and nearly half a billion dollars in student fees were eliminated.
I have included in attachment B to the testimony one example of the form, a state supplement that is twice the length of the current FAFSA, for your information. But discussions are under way at the Department to eliminate state data elements in the name of simplification. The effects, Mr. Chairman, of such a change are inescapable. More forms, more burden, more confusion for students and parents across the country. But far worse could occur under a reauthorization proposal now circulating within the Department to change the income collected on the FAFSA. Currently, the FAFSA collects the most recent tax data available, so-called "base year." The proposal under consideration would ignore those data and substitute data from 1 year earlier, the so-called "prior, prior", or PPY. In addition, the proposal would eliminate all assets from both the FAFSA and the federal eligibility calculations.
If implemented, this proposal would undermine simplification and integration obtained over the last 5 years. Why? Because the validity, fairness and completeness of the federal application and eligibility determination process would be compromised.
Mr. Chairman, no private institution would use 2-year-old income, combined with absolutely no asset information, to determine eligibility for their own scarce need-based funds. Neither would most states. The prior, prior year proposal amounts to a suggestion that a system not good enough for private institutions, not good enough for states, and not good enough for any modern financial institutions is nevertheless good enough for Congress and the Department to deliver $50 billion in student aid.
Let me be absolutely clear about one thing. The adoption of the PPY proposal with elimination of assets would require all responsible providers of need-based aid, including most financial aid administrators delivering federal funds to collect base-year income and assets in some other way, to ensure fair treatment of parental income and assets and avoid systemic harm to independent, nontraditional students. Thus, additional forms, databases, eligibility models would quickly proliferate.
I would close by making two observations. First, like the financial institutions, each of us places our trust on a day-to-day basis, the federal application and eligibility system that distributes $50 billion in federal student aid has to be judged against modern financial standards, and to use 2-year-old income information, when base-year income is readily available, cannot be justified by those standards.
Second, like federal human resource programs outside higher education for example, health and welfare, the federal student aid system has to meet a common test of fairness. Simply ignoring hundreds of millions of dollars in assets in determining federal eligibility for Pell Grants, campus-based aid and subsidized loans fails this test. The Advisory Committee hopes that Congress will caution the Department against elimination of State data on the FAFSA and reject the use of prior-prior-year income and elimination of assets in favor of proposals that build upon what has already been achieved, for example, making the FAFSA the loan application.
I would be happy to answer any questions you have about the committee's recommendations. Thank you, Mr. Chairman.
Chairman McKeon. Thank you very much.
See Appendix F for the Written Testimony of Ms. Lola J. Finch
Chairman McKeon. We have, as I stated, an excellent panel here; and you can see that now after their testimony. There is quite a lot that we need to discuss.
I personally would rather do this in a little room where we can sit around a table and have a give-and-take session, but I guess we have to go through this formal process. I am sure, before the bill comes out, we will sit down and do that because that is very important.
I think that the one thing we all agree on is that, through this process, we want to make sure we improve the system for the ultimate user, which is the student. I think we get caught up in politics and in programs, but what we really need to focus on is delivery of the student aid to the student in the best possible manner.
Dr. Longanecker, in your testimony, you note that we cannot lose sight that our primary responsibility is the student. However, in that same paragraph, you raise a concern about guaranty agencies using federal funds to offer discounts to students and state your opposition to lenders offering discounts as well. If the funds are being used for the benefit of students and student costs are being lowered, I believe that you have lost sight of the student because of your interest in promoting the Direct Loan program.
In addition, during the recent budget conference, the Department sent a proposal to us which would have guaranty agencies use the interest earned on the restricted accounts established for holding reserve funds to provide loan forgiveness to certain borrowers as a default reduction activity.
Providing incentives for good behavior is exactly what we should be doing. As a matter of fact, it is exactly in line with many of the President's tax proposals, such as rewarding students with a tax deduction for good payment on their student loans.
Lenders currently offer discounts on interest rates for students who use electronic means for repaying the loans, since it reduces their cost. What is wrong with that benefit? Lenders also discount interest rates for students who make all their payments on time. This encourages good payment behavior, lowers the lenders cost, and yet you oppose these benefits for students. Instead of opposing student benefits, why aren't you trying to extend these types of benefits to the Direct Loan program, as suggested by Ms. Storie in her testimony?
Mr. Longanecker. Actually, that is our point. What we would like to make sure is that these benefits are available to all classes of students and to students in both programs.
The way the program is working today is, if you are an advantaged student who borrowed a lot of money and consolidates your loans, you get an advantage from the Student Loan Marketing Association or, if you happen to be in one of the few states that provides this benefit, you get an advantage. But if you happen not to go to an institution with as strong a record as the University of Maryland, so it isn't able to develop those kinds of relationships with lenders, you don't get those kind of benefits. Guess who goes to those other institutions? It is the most needy of our students.
So what we would like to see is all students having equal access to those, whether they are in the Direct Loan program or the FFEL program or if they are in one of those programs, whether they are in Minnesota, California or Kentucky or the District of Columbia.
So we would like to see that students are not being induced to participate in this bank or this program or whatever by the price, but that they are being rewarded for the behavior of repayment. That is a wonderful idea. We would love to do that. We cannot do that by statute in the Direct Loan program.
We think there are ways to reduce the fees. We suggested eliminating entirely the guaranty agency fee for all students in this country and the origination fee for all students in this country, not just for a select few.
Chairman McKeon. I think this is something that, as we move forward, we are going to have to address and come to a meeting of the minds on this.
I know when I first came here to Congress I was working hard against direct loans, and I have seen some benefit come from them. I think what we have to work against now is subtle attacks on one or the other. I think we have to realize they are both there, they are both of benefit, and we need not undermine one at the benefit of the other. We have to focus on what is best for the student and the best we can get there, so that is something we will have to hammer out as we go through this process.
Mr. Kildee. Thank you, Mr. Chairman.
I would like to address the subject raised by yourself in maybe a somewhat different manner. Today, participants in the FFEL program can provide borrowers incentives and benefits that cannot be provided in the Direct Loan program because it will drive up the cost of the Direct Loan program. Is there any way we can address the situation in a way which will benefit students and their families without busting the budget or changing the budget agreement?
In other words, FFEL is able to give incentives that, Direct Loans cannot. Since we have agreed, pretty well, to try to keep the same basic mix and not get involved in the big fight we had last year, how can we address this matter, within the budgetary constraints that we have?
Mr. Longanecker. Well, this is an area that I am sure there is some disagreement here on the panel, but we believe there are some excess profits remaining in the FFEL program that could be used to help reduce the cost to students. We believe there are excess reserves out there, and there is a much more efficient and effective and modern way of paying the guaranty agencies for what they did and that those reserves could then be recaptured to help provide some of that benefit to students who are at large. I mean, it is billions of dollars that could be brought back to help provide benefits for students in the programs.
Mr. Kildee. I guess what I am really concerned about, the Chairman and I have agreed to keep the same mix between the FFEL and the Direct Loan. FFEL does have this ability to do what we really can't do quite so well in the Direct Loan program; and I am still trying to figure out how we can keep the mix and still not give one an advantage over the other. We want to help the student get the break, but how can we do that in a Direct Loan program within the budgetary constraints?
Mr. Longanecker. Well, if we eliminated the guaranty fee and the origination fee, we would reduce the cost to students in both programs which would be of benefit to all. I mean, we didn't propose to give Direct Lending. We proposed that we have a fixed price for all students. If there were other ways to get at that.
Actually, I should probably come back to you with some creative ideas on that because, with the exception of what we already put in the budget, we don't have any other sort of budget savers to offset the budget costers, though there are substantial budget savers that are involved there; and I think the recapture of the guaranty agency fee would be a useful way to help provide broader benefits for students throughout.
Mr. Kildee. Does anybody else have any comment or suggestions on that?
Let me ask you this. We have dropped the default rate from 22.4 to 10.7 in the last 4 years. What is the default rate in the Direct Loan program now? How are we doing on that?
Mr. Longanecker. It is really difficult to say. At this point, it is just about the same. But the portfolio that is in repayment is so modest, actually, it is lower than that. But I don't want to claim credit for a wonderful default rate because, right now, only a billion dollars have been repaid, about $5.7 billion are in repayment. Much of that, in fact, is just going into repayment, so it is a little bit unfair to claim great success for the Direct Loan program. I think in a year or two we will be able to demonstrate very positive results on default. We could claim statistically that today, but it wouldn't be quite fair.
Mr. Kildee. Thank you very much.
Thank you, Mr. Chairman.
Chairman McKeon. Thank you.
Mr. Barrett. Thank you, Mr. Chairman. I agree with you. This is excellent testimony from this panel this morning.
Dr. Longanecker, I couldn't help but note your continued advocacy for the Direct Loan program; and I am wondering, do you have any figures, any percentages, on the proprietary schools that are taking advantage of Direct Lending?
Mr. Longanecker. Yes, that is, actually, in my full testimony, you will notice some of the statistics. There is a tremendous overrepresentation. I believe it is around 6 percent of the volume in the program that are proprietary schools. As a share of the number of schools that participate, it is around 50 percent.
But keep in mind 50 percent of the schools in the universe are proprietary institutions that we work with, so it is slightly higher representation. I think it is closer to 60 percent, actually, the schools we have on that, slightly higher than the proportion in the overall population but not appreciable. In terms of volume, they actually tend to be smaller schools; and, as a result, the volume was only around 6 percent.
I might actually mention that often behind that is concern about managing the program and about the concerns about the program. If those are at-risk institutions, and sometimes proprietary schools are, most are not, clearly disproportionately. I would rather have them in the Direct Loan program because we have much better management information systems in the Direct Loan program to keep track of what is going on.
I can tell you what was borrowed today in that program, and I can't do that in the FFEL program. So we believe that if we have an at-risk institution we have a better chance of working with that institution and managing the circumstances under Direct Lending than we do under FFEL.
Mr. Barrett. Well, there is a perception out there, as I think you know, that some of our proprietary institutions will become the major beneficiary of Direct Lending and for the higher default rate. This is of great concern to a lot of people.
Mr. Longanecker. Well, right now, you would be better off if you were an at-risk institution in FFEL, I suppose, than Direct Lending, because we count those students who are in income contingent repayment who are not making a payment. We don't say that student is a defaulter, but we count their lack of repayment in the default rate. So that is something that is counted in Direct Lending that is not available and counted in FFEL.
The big participation in FFEL is from the large research and land grant universities in the country. They are the predominant volume and majority. I mean, they are overrepresented in Direct Lending.
Mr. Barrett. Thank you.
Mr. Tone, I was interested in your testimony in which you talked about lowering the cost to borrowers; and it has already been mentioned, interest rates by one percentage point reduced after the first 24 months for on-time payments, et cetera, et cetera. Electronic or direct deposits could see their interest rates dropped, so on and so forth. Then, playing off of a comment Dr. Longanecker made a little while ago, the obvious question, is, is this a situation in which you have excess profits?
Mr. Tone. Good question, Congressman.
The Congressional Research Service issued a report earlier this year that clearly indicated there are not excess profits in the student loan program. The borrower benefits that have been talked about by this panel and by you folks are offered as a result of the fact that we have come up with ways to be more efficient. We have identified more cooperative tools that we can work together on delivering better services, thereby reducing our costs.
As we have reduced those costs, what we have done is attempted to pass some of those savings on to the borrowers that paid on time. It is not a special class of borrower. Benefits are available under these kinds of programs in every State in the Nation, either offered by Sallie Mae or by commercial lenders or by secondary markets. There are programs again that result from reduced costs, additional efficiencies that we have tried to create in the FFEL program.
Mr. Barrett. So you would not necessarily be in agreement with the Secretary's point that these excess profits could be used, then, to help balance the budget or keep the budget intact?
Mr. Tone. If we had excess profits, we would be delighted to pass them back to the Secretary.
Mr. Barrett. So we should not consider lowering costs to borrowers, as far as you are concerned.
Mr. Tone. That would put us in a position where it might be difficult to have any profit at all.
Mr. Barrett. Thank you, sir.
Thank you, Mr. Chairman.
Chairman McKeon. Thank you.
Ms. Woolsey. Thank you, Mr. Chairman.
I want to thank you for this balanced panel and let you know that I agree with both you and our Ranking Member that it makes good sense to have both direct loans and FFEL. We are proving that right now that by having good, healthy competition and now, we debate how to improve the system, not whether or not we should have the dual system.
And thank you, panel. You are wonderful. You are so wonderful I am not going to talk about what you came here to talk about. I want to pick your brains about student loans.
I am so concerned about the cost of loans that I have legislation to encourage states to offer prepaid college tuition for kids and to have parents start saving early on, like Virginia and Michigan and Massachusetts and other states do now. I would like your opinion on this. What do you think? Will it happen? Are parents, middle- and low-income families able to do this, particularly middle-income families? Will it make a difference in the long run, saving at today's dollars, at today's tuition rates?
Mr. Longanecker. I would like to address that. Because there are some very important proposals before you today on the tax bill that would provide encouragement for families to save for very young children and for other children, both through the $500 tax credit and the Kidsave proposal. I think that is a very novel and interesting idea.
There are other ideas for expanding the use of IRAs or creating educational savings accounts. Those are all advantageous, and I think state programs are really fine.
The dilemma with the state programs, and I would caution you to look at those, are very forward thinking and very useful. Others are going to be great for a few of the people and not so great for others, because some of them are more limited than I think many of the investors in them realize.
You only receive the substantial benefit if you attend an in-state institution. Given the mobility of our society, it is not clear and if you take it, you lose the appreciated value of that investment when your child chooses to go to a state that you happen to be transferred to, rather than the state in which you made that investment. That then would not have been a very good investment.
So, absolutely anything we can do to encourage people to save, we ought to be doing. If the tuition prepayment plans, which are more like an insurance plan, fit a family's interest in sort of risk circumstances, that is great; but let's make sure they are really of value to the people, rather than something that sort of looks like a deal that might be better than it is.
Ms. Woolsey. We will talk further with your Department about that and make sure it meets those goals.
Dr. Fitzgerald, you looked like you wanted to speak.
Dr. Fitzgerald. Congresswoman, let me offer the caveat that our committee has not looked at this extensively, but I think I could speak for most members and suggest that it would probably work relatively well for middle-income families, but I suspect my members would be very concerned about low-income families.
I agree with Dr. Longanecker that we have to do everything we can to encourage families to save; but we will, I believe, find ourselves in much the same situation in education in the future as we do in health care today. That is, working families simply cannot afford what I think Dr. Longanecker very accurately called an insurance policy. It is, in effect, a higher education insurance policy; and I think those two potentially conflicting goals really do need to be managed very carefully.
It is very clear that states are having difficulty supporting higher education in the manner they have over the last 20 years, that families who can afford to save will be expected to. But a program that sets aside money for middle-income families potentially with tax benefits, potentially excluded from any eligibility calculations for federal assistance will reinforce the advantages those families have at the expense of lower-income families. So I think it is important to maintain a very balanced approach as we look at these issues on a federal level.
Ms. Woolsey. Well, thank you.
My main concern is that we do have some support for low-income families with Pell grants. High-income families really can afford to put away and invest for their children. It really is middle-income families that are getting squeezed. So I would like to work with you in making sure that it would work for middle-income families without disadvantaging low-income families.
I think my time is up. Thank you.
Chairman McKeon. Thank you.
Mrs. Roukema. Thank you, Mr. Chairman.
I do want to say, following up on what Mr. Kildee asked with respect to the Direct Loan, I don't want to go into the details of that. Dr. Longanecker, you are smiling. Do you know what I am about to say?
Mr. Longanecker. No, no.
Mrs. Roukema. I want to say I remain a skeptic on the Direct Loan program, and I say that not as a partisan statement. I think some at this panel will agree that I go my pretty independent way, much to the chagrin of the Chairman once in a while.
But the point I am making, and it concentrate on now; but I just want to declare it here to the extent we can improve the Direct Loan program. I think it is a bureaucracy that is going to greatly grow, I just want to follow up on it. Because both Mr. Kildee and Mr. Barrett related it to the question of the proprietary schools; and, please, I was one of the leaders in the reforms on the student loan default program. We all know the component of proprietary schools and how much of that they were a problem.
I would just like your cooperation and would love to work with you in any other ways that we can improve that student loan default program, in whatever ways we have to go further, whether it is with respect to proprietary schools or other schools. So I would like to work with you on that.
Mrs. Roukema. But my question is to the panel in general, because each one of you in your own way made reference to regulatory relief and simplifying programs, and I am just concerned. I know that the jargon of regulatory relief is very popular in political circles these days, but I am concerned that those changes under the banner of regulatory relief not result in going back to the bad old days of increasing the default record and lessening the accountability of all the schools and the loan officers and the lenders.
So if each of you could be a little more specific on what you mean by regulatory relief and how we protect against having the unintended consequence of going back on our reforms, I would appreciate it. If we don't have time here, whatever you would like to introduce into the record or send to me directly, I would love to work with you on it.
Ms. Storie? Mr. Leith? Who would like to lead off?
Mr. Longanecker. Actually, I would love to, because what we are trying to do is develop a program where we could base our regulation and our administrative burden, if you will, the amount that we look at an institution, impose on an institution or a lender or guaranty agency is based on their past performance.
So rather than treat each institution as though they were the same as every other institution, we would have a performance-based system. We are working with Coopers and Lybrand to develop a risk analysis system that would allow us to do a better job of assessing where we, as a department, need to focus our attention, and then spend less time worrying about those institutions that have a long, strong history of positive performance with us and more of our time on technical assistance and policing.
Mrs. Roukema. Do you have that discretion under current legislation?
Mr. Longanecker. No. We will actually be seeking some help in reauthorization on that.
Mrs. Roukema. I would like to look at that. I am not assenting or agreeing at this point. We will look at it together.
Ms. Storie or Mr. Leith?
Ms. Storie. I certainly couldn't agree with Dr. Longanecker more. Unfortunately, the types of institutions that you are referring to are not present here, I am happy to say. While American University, I am sure, is not perfect in their administration of student aid, but our default rate is 2.7 percent so, we don't have issues with those types of problems.
Many of the regulations, I believe, that exist now are written for schools that have had difficulties in the past for which there was a tremendous amount of fraud and abuse, and there are certainly things that we still need to keep in mind, but I don't believe that it is fair to penalize other schools and students at those schools, making them jump through excess hoops to obtain financial aid when things are going all right there; there are not high default rates; students are not getting their loan checks and skipping classes for the rest of the semester. A performance-based program would be ideal, in my eyes. I am not sure if it is realistic.
Mrs. Roukema. We can look at that together. I thought that was a component of the reforms that we set in. Maybe we didn't do it completely enough. I understand what you are saying.
Mr. Leith. I just wanted to mention that we currently do receive some regulatory relief within the student loan process under the experimental sites. It is tremendous. Our students, first-time students, can receive their loan funds on the first day of classes, as opposed to the 30-day delay. If we have a student that has a loan period of one semester, we don't have to do the two multiple disbursements in that semester; we can give the student the entire loan up front. And we measure the impact that this relief has on the intent of the programs, and, again, at our institution there is no impact other than the student benefits.
Mrs. Roukema. I am sorry; there is no what?
Mr. Leith. The impact to students' benefits. So that type of regulatory relief within the program based on performance measures has served us very well.
Mrs. Roukema. Mr. Tone?
Mr. Tone. Briefly, Congresswoman, we have experimented in the FFELP industry with self-regulation in recent years. The common manual that the guaranty agencies has developed has been an extraordinary benefit to lenders and students and schools in that it effectively does create regulations, but self-regulation that is less cumbersome, more responsive to the industry, more responsive to students, and avoids some of the duplicative kinds of regulations and duplicative oversight that occurs from time to time in some of the regulations that come to us from the Department.
Mrs. Roukema. I would certainly like to look at that a little more closely, because self-regulation can often mean creating loopholes.
Mr. Tone. Good point.
Chairman McKeon. Dr. Fitzgerald, the chairman will give 1 more minute here.
Mr. Fitzgerald. Thank you.
Our committee has been on record for quite some time in urging the Department to create a real-time credit card like system for student aid, and that would not only permit the ability of the Department to manage performance retrospectively, which is to say periodic audits and other measures, but, in fact, to be measuring the performance of the institution on a real-time basis.
Part of the problem with our current system is, even though there is an ability to impose certain types of restrictions on institutions, it is all after the fact, and I think the committee feels very strongly that a real-time system with a good management information system to provide the Department with real-time information on the performance in schools, giving benefits to those schools that are performing well and being good stewards of federal funds and imposing tighter controls on institutions that are not performing as well.
Mrs. Roukema. Thank you very much.
If you have others to add, send them in written form to the committee.
Chairman McKeon. Thank you.
Mr. Roemer. Thank you, Mr. Chairman.
Dr. Longanecker, I would like to begin with you and start by congratulating you on two things: One, on the implementation of the Direct Student Loan Program. I just had a hearing in my district, where I have nine universities, two of which sang the praises to the cathedral ceilings of the Direct Loan Program, Goshen College and Indiana University at South Bend. They love the program. And then the schools that were participating in the FFEL program also said that they thought the Direct Student Loan Program was beneficial because it created competition and the two programs ultimately complemented each other. So congratulations on that.
Secondly, congratulations on cutting the default rate from 22.4 percent in 1992, roughly a year the after the Clinton administration they came into office, to about 10.7 percent now. The cost to the taxpayer in 1992 was about $1.7 billion; today it is $249 million. So we are saving the taxpayer about $1.5 billion. I think that that is a great story. If you said it in your testimony, I am reiterating it and congratulating you on that.
I hope that there are some lessons from what we have done over that time period to how we can better reauthorize this act coming up this fall.
Now, I want to go back to something you said earlier about the FFEL program. In the reconciliation act, it seems that there is about $1 billion that Congress agreed that could be taken out of the reserve program, not the profits but the reserves; is that correct?
Mr. Longanecker. That is correct.
Mr. Roemer. And was that figure as high as 5 billion, 4 or 5 billion, in some of the initial drafts of the reconciliation?
Mr. Longanecker. I believe there may have been. I don't know what you folks were talking about in reconciliation. For that piece, I think we were estimating something in the range of $3.5 billion for the guaranty agency component. There were other savings that we projected could be achieved from lender subsidies, and the combined effect of those was closer to $5 billion or $4 billion.
Mr. Roemer. That based on how much money in reserves currently?
Mr. Longanecker. I believe there is a little over $2.5 billion in reserves at the present time. I have sort of forgotten all of my numbers. There is over $2 billion in reserves. We were projecting that those reserves, because of a new way of looking at guaranty agencies and working with them, there would be no need for reserves in the long run and we could recapture all of those, which the courts have determined are federal funds, and those then could be used to reduce the fees for students.
Mr. Roemer. And to the best of my knowledge, the Federal district court has ruled that those are indeed Federal funds?
Mr. Longanecker. Yes. In fact, when I was the head of the agency that ran a guaranty agency in Colorado, I sued the federal government and lost that case.
Mr. Roemer. Will you contact my office with respect to how much money is in reserves and provide us with any additional information on efficiencies and savings?
Mr. Longanecker. Yes. I should know that, and I apologize.
Chairman McKeon. For the record, it is $2 billion.
Mr. Longanecker. $2 billion presently. I think we projected that it would grow to $2.5 billion by the end of the budget period.
Mr. Roemer. Secondly, following up on some of the other questions about regulatory reform, many of my universities are concerned about this way that the Department of Education approaches regulatory reform and kind of a one-size-fits-all format. I have some schools in the State of Indiana that have rather high default rates. I represent the University of Notre Dame, which has a 1.5 percent default rate.
Specifically, what kinds of things should we look at that might trigger the differentiation between how we look at a school with a 10 or a 15 percent default rate and a school like American University or University of Maryland or Notre Dame that has a very, very low default rate?
Mr. Longanecker. Well, we have developed an overall approach that would allow institutions that demonstrated high performance on a set of criteria that made good sense; that is, they hadn't had major program review findings from us, they had relatively modest default rates, they hadn't shown any precipitous change, increase or decrease, in the use of federal financial aid. And there are a variety of indicators that we are developing in risk analysis that would allow us to determine what the institution's history of performance in the programs were. And if that was strong, and if they were in a strong financial position, which is one of the requirements and also is a good strong indicator of whether an institution is likely to get into trouble, then we would not need to perhaps ask them for an annual financial audit and an annual compliance audit, both of which are quite onerous on the institutions, but we could look at them more periodically.
The president of Williams College was suggesting maybe we align the compliance audits with the accreditation review so that the institution didn't have to do that work all the time.
So there is a lot we think we can do to have this differential performance. What I would like to do is to bring some of that material up to you and share it in greater detail, because we think there is an awful lot that can be done.
There is a wonderful book out, "The Death of Common Sense," which my staff and I have all read, and we think that for very good, well meaning reasons, we sort of lost our head in the last few years, both in terms of the law and in terms of the way in which we regulated. We need to get more common sense.
Mr. Roemer. In addition to what we currently use, will you be forwarding or recommending new guidelines?
Mr. Longanecker. Yes, we will need some flexibility and we will need some guidance that doesn't exist in the current law.
Mr. Roemer. I look forward to our meeting.
Thank you, Mr. Chairman.
Chairman McKeon. Mrs. McCarthy.
Mrs. McCarthy. Thank you.
I apologize for missing the testimony. I meet with a lot of parents and students in my district. I spend almost every Monday and Friday in the schools; we come from a middle-income district, even though our income is higher on average than around the country. The biggest thing I hear, is that the schools have programs in the lower grades to teach parents how to save money to send their kids to college. They are saying, start saving $100 a month. Well, if you are a young family with two or three children, $100 a month is difficult to save. And parents just walk away, and, unfortunately, they don't even try to save anything.
I think that we have to encourage parents to save. I don't care if it is $10 a week, that still builds up to something for the future. I don't know if you remember, when we were kids, we had little savings accounts and you put a dollar in a week. Those of us who did that, we had some money by the end of high school. Not enough for college, but it was still better than nothing. I think the Department of Education has to increase education to teach parents to save.
The other big complaint from the high schools is that, the parents can't figure out how to fill out the financial aid forms. And even speaking to some of the guidance counselors, I question how much training some have in helping the students find student loans that will help them.
I would like to know if there is a way the Department could address that?
Mr. Longanecker. You bet. Actually, I wanted to say we all did a great job in testimony. Everybody said we did. So you missed some great testimony. I want to assure you of that.
One of the things that we did talk about, or I mentioned, is that we have tried to look from the Department or from the administration at higher education. We are trying to blend the policies across the government. So in tax policy, budget policy and authorizing policy, we are trying to make those all fit together as an integrated whole rather than as disparate parts. And, as you are aware, the President has a fairly aggressive position on the tax side focused on middle-income families to encourage them to save and to provide them some relief when their children do go to college or when they go to college. We think that is one of the important messages on the savings sides.
But in reauthorization, there are two things that I think you can do and help us to do. One is to help eliminate the perception that saving is a disincentive, is a penalty for families in the need analysis. To some extent, that is more of a perception than it is a reality. That is a scenario where Brian and I would clearly disagree. But our analysis shows that assets for poor people don't contribute much to the analysis and we need to find a way to make it clear that they are not going to get penalized.
We think there is a way and will present a way where we think we will have expectations of assets, but we will expect it of all families at certain income levels rather than just those who save and give a benefit to those who didn't. So there would be a positive incentive for saving rather than a negative sanction for having done so.
The FAFSA is a difficult process. We have done some focus groups, and we have even televised them. It is almost embarrassing to watch intelligent, bright Americans try to work their way through this FAFSA. It is better than it used to be, it is a lot better than it used to be, and it is still extremely valuable. But we need to find a way to make this a lot simpler so that Americans think we are working with them rather than against them.
Mr. Fitzgerald. Congresswoman, I think one of our committee's recommendations that I think will help with some of the problems that your constituents experience is a recommendation that, particularly using technology, that the federal government begin to make information available to families at a much earlier period in the educational process so that families can, through a relatively streamlined process, just a few data elements, get a sense of what they might qualify for today. For example, a family could sit down, whether it is in a paper format or on the World Wide Web, could say, if I wanted to go to the University of Indiana, or Notre Dame or Maryland or AU, what do families like me, or your constituents, qualify for?
I think the notion of getting that information out there is extremely important. It will deliver a message, for example, that middle-income families do need to save, because, realistically, we will continue to expect families to support their children in higher education or themselves if they are an independent student.
But it will also send a very positive message to lower-income families that aid is available, and I think it will help to counteract the unfortunate press that higher education is receiving and basically sending the message that college is not affordable when, in fact, for most families at most institutions, it is affordable.
I think some things that we have done in the past that clearly need to be improved are to shorten the amount of data that low- to moderate-income families need to provide. For example, families right now under $50,000, most families under $50,000 don't have to provide any assets currently under current law. We need to improve that simple needs test. But, as I think David Longanecker has said very clearly, we have made significant progress. We clearly need to make more. The programs cannot be effective if they cannot be accessed by families.
Chairman McKeon. Thank you.
On the point that you just made on the publicity that probably discourages a lot of potential students and a lot of parents, I have some real concerns about that also, because I think that, out of the 7,000 schools that we have out there, there are a lot of different ways to get education, and probably half of our high school students leaving high school go to community college, which is much more affordable than the numbers that you hear. We hear of $25,000 a year for tuition, and that discourages and turns people off when there are good education’s available at very affordable rates.
The commission that we just set up to look at the rising cost of higher education will hopefully find that there are some good, positive things out there that are happening and that college, higher education, is affordable. That is a big concern I have, that many students are being discouraged, and without even trying, they are giving up, something we need to fight against.
Following up on, I did not use all of my time before, even though they hit me with the light, but on Mr. Roemer's question about the guaranty agencies, I had just a couple of quick questions, if I could get some quick answers.
Dr. Longanecker, what do the guaranty agencies do?
Mr. Longanecker. Guaranty agencies do a lot of very valuable services. They do pre-claims assistance; they do a lot of the technical assistance with the lenders; they do a variety of different services, which I should be able to rattle off very quickly.
Chairman McKeon. They kind of stand behind the banks to make sure that the banks are willing to go out and lend the money for some people that would be marginal?
Mr. Longanecker. They try to make the process easier so that the banks, which are reluctant to get into the business of providing uncollateralized loans, do. So they have provided and continue to provide very valuable services. Basically, what we propose is that we just pay them a reasonable amount for the services that they provide.
Chairman McKeon. The reserve that they have is right now $2 billion?
Mr. Longanecker. That is correct.
Chairman McKeon. And by law, according to what you said, and I would agree with that the law has stated that those funds belong to the government. I would question it, but I agree that the courts said that. If that is so, why have you not gone after those funds earlier?
Mr. Longanecker. Well, those funds…
Chairman McKeon. By now, you could take back anything that the guaranty agency has over 2 percent; right? And you have not done that to this point.
Mr. Longanecker. That is correct.
Chairman McKeon. My question would be, why have you not? Do you think that maybe might put these guaranty agencies in jeopardy, which in turn then would reflect back on the banks who make the loans and make them less likely to make the loans, which in turn then in the long run would harm student loan programs?
Mr. Longanecker. No, that hasn't been our reason.
Chairman McKeon. How much do you think you can take that reserve down and still leave them comfort to operate and make their loans?
Mr. Longanecker. We believe we can take that reserve down to nothing and provide them with a fee for service for all of what they do.
Chairman McKeon. Basically what that reserve, as I understand it, and I have talked to some of these agencies, is kind of the cash flow to pay the banks for defaulted loans while they are waiting for the government to pay them for their services. And I have had the opportunity to work with banks, financial institutions, and I know that school boards, when I served on the school board, we had a very small reserve component in our budget.
It seems to me when you take reserves out of a business, you put that business in jeopardy, and these reserves, I think, are necessary for them to function and continue to provide services.
Mr. Longanecker. Absolutely. In our proposal, we would have provided a component that would have provided for some cash flow. In addition to that, it is not that we are taking out their reserve as a business, we are taking back the federal reserves. In our proposal, we would allow them then to generate, through efficiencies in their operation, reserves that would not be federal reserves, they would be theirs as a business to manage as they would wish, and if they operated more effectively, they would get a fee that we would provide the fee for performance.
Chairman McKeon. As I see it, the system right now discourages efficiency, because it encourages guaranty agencies to not worry about building. If those who worry about being efficient and build up a reserve, versus those who do not, a business that says, hey, why build up reserves? They are going to take it anyway; we will have higher salaries, and we will spend the money elsewhere. I think this is something we really need to look at.
Mr. Longanecker. Our argument is, that is precisely what is happening in California, your state. They have used this to discount the student loans. They are basically using federal dollars to eliminate the guaranty agency fee to compete disadvantageously, from our perspective, with the direct loan programs.
Chairman McKeon. Which helps students.
Mr. Longanecker. Helps students in one program, but not the other, but clearly is being used as an advertising ploy.
I have a letter from the head of that Colorado Student Aid Commission where he is reminding presidents how much disadvantage they are wreaking on their students.
Chairman McKeon. They would say that they built those reserves by taking adequate business steps to ensure that, and then they are turning around and using that to help students. It seems to me, back to our final, or our original proposal, is what we are here for, is to help students.
Mr. Longanecker. Absolutely. All students.
Chairman McKeon. Okay. Thank you for…
Mr. Ford. Mr. Chairman, can I ask one question, sir, if you wouldn't mind, sir?
Chairman McKeon. Mr. Ford.
Mr. Ford. Thank you, Mr. Chairman.
Certainly to Mr. McKeon and all the panelists, I want to apologize for being late. But it is good to see you, Mr. Secretary.
One quick question. I am hearing a lot, and I am sure other members up here hear often from constituents and families and students, about how they are choosing professions and how they are choosing their majors in college.
One of the concerns on this committee is that we see a dearth of folks going into the teaching profession, and many young people complain and complain quite loudly that the starting salaries in those areas don't match up to some of the other areas.
To what extent have you seen and the Department of Education have data with regard to young people making choices due to the rising costs of tuition, based on the fact that tuition is so high and having to pay back loans anywhere from $400 to $1000 a month? And I just graduated from law school last year, so I am uniquely aware of some of these burdens and challenges that my peers face.
To what extent do you think the rising cost of tuition influences, really, I guess, the direction that kids go and the majors they may choose and the professions they may choose to enter?
Mr. Longanecker. Well, good economics would suggest that markets determine to some extent where people go, and there is some of that, absolutely, occurring. That was one of the reasons, in fact, behind the President's interest in the Direct Loan Program, was the income contingent loan repayment which we were able to provide through that which allows a student to manage their debt over a period of time. On average, those students will pay back their loan in 15 years, but if it takes longer because they choose a profession that is lower income, they are able to do that.
In addition to that, specifically with reference to teaching, we will have a pretty aggressive position on teacher education in our proposal. The President has announced his initiative last week, and it will include some incentives to try to get people to enter the field of teaching and to return to particularly difficult areas in which to teach, where the needs are most critical in the future.
But I think there is at least very strong anecdotal evidence that the cost of education does affect the fields into which many students go for their work. So we need to find ways, not to necessarily try to beat the market, I don't think we can probably do that, but we at least need to find ways to alleviate those pressures so that they can do that, and we think income contingency is a good way in which we can address that.
Mr. Ford. Thank you, Mr. Chairman.
Chairman McKeon. Thank you.
Mr. Kildee. I thank you, Mr. Chairman.
Just one further question. Before I do that, two other people I would like to recognize who have labored in the vineyard, whom I have known for a number of years. John Dean, who worked for Tom Coleman. I can recall traveling to Tom Coleman's district. He was a very great member of this committee.
Good to see you, John.
And then Colleen McGinnis, who also worked for Mr. Ford, is now with the Department, and I appreciate what she has contributed in this area.
Just one question. Current law provides that as of July 1st of next year, student loan interest rates will be based upon the 10-year T-bill rate, as opposed to the current practice which uses the 91-day T-bill rate, and some lenders are objecting to this change.
Maybe, Dr. Longanecker and Mr. Fitzgerald, you could give us some comments, or any of you, on that.
Mr. Longanecker. Mr. Tone raised some concerns about that in his testimony. We have been comfortable with that change coming along, because it provides at the present time a substantial benefit to borrowers.
The industry has raised questions about the efficacy of that index and the use of that index. I think we would be willing to sit down and talk about whether there are better ways to index, but we still would like to see, in the present environment, those savings accrue from that for the borrowers, which is what current law would allow.
Mr. Kildee. Mr. Tone?
Mr. Tone. The issue with regard to the 10-year index is the fact that it fluctuates fairly volatility. As a result, it is very difficult for a lender or someone trying to finance student loans to match financings with the volatility of the 10-year index.
The result is, in some instances, to the extent a lender would be asked to make a loan when the 10-year index is at its lowest point, they might actually be asked to make loans when clearly they would be making loans at a loss. Not many of the lenders that participate in the student loan program will make loans at a loss with the expectation that it might, in fact, rise at some later point.
The volatility of the 10-year index is really the critical issue as it relates to how the student loan rates are indexed, and we look forward to working with you folks in a way that actually comes up with a solution to that particular problem. It is very important to us.
Mr. Kildee. All right.
Thank you very much, Mr. Chairman. I thank the panel. It has been a very, very good panel. We have learned some things this morning, and you have been very helpful to us.
Chairman McKeon. We want to thank you for being here. As we have said to each of the panels as we have gone through this process, we know that there may be something that you wish you had said. We would encourage you to send that to us, and we will get it into the record.
As we move through on the process of authorization the Higher Education Act, we would like you to work with us to make sure that we take this opportunity as one to improve things and not make things worse, and encourage your full participation in this.
Chairman McKeon. Thank you very much. We will now adjourn this hearing.
[Whereupon, at 11:03 a.m., the subcommittee was adjourned.]