indeed, if all they are trying to do is have a revolving fund, then maybe there are devices in which they can be assisted in doing so.

Dr. PHILLIPS. I think we would be happy to explore those kinds of options with the committee.

Mr. O'HARA. I have compared the College work study program State allotment percentage with the direct student loan State allotment percentage.

Dr. PHILLIPS. In Michigan perhaps?

Mr. O'HARA. Well, let's see. I didn't look at Michigan particularly. It is on the list, though. Because, you see, two very different kinds of formulas are used, as you well know-the work study formula feeding in things about the number of high school graduates in a State and other factors in addition.

Dr. PHILLIPS. Low income families and so on.

Mr. O'HARA. Right. It would appear, well, I don't know if you have any observations about the comparison, apparently not-well, you have Indiana which Mr. Brademas would be interested in. Indiana gets 40 percent of its panel-approved funds under the direct loan program and in fiscal year 1974 and 68 percent under the work study program. That is panel approved.

In others, the differences are you know, different.

Dr. PHILLIPS. Yes. I think as we tried to suggest when we appeared before you in connection with the work study program, the State percentage formula exists and operates pretty much independently from any assessment of the need within a given State for the funds, except for the portion of the 10 percent funds to which regulatory authority applies.

Mr. O'HARA. Except the panel judgments within a State pretty well reflects the need.

Dr. PHILLIPS. That reflects the need, but the relationship of that need to the actual amount that goes into the State, they are largely independent variables.

Mr. O'HARA. I was wanting to see if the one State allotment formula worked any better than the other and I see that neither of them worked exceedingly well.

Ms. HOPSON. One difference between NDSL and Work-Study in the funds awarded for the upcoming year is that the operation of the regulatory and statutory provisions differ, because the NDSL amount available was not sufficient to get to the point where every State could be brought back to its 1972 level. Therefore the funds available, with the exception of a few States, went out almost precisely as in 1972, whereas in work study, for instance, the portion of 10 percent funds remaining after raising all States to their 1972 level was not extensively in 17 States and that altered the amount of money going into those States, whereas that didn't happen in NDSL.

Dr. PHILLIPS. Incidentally, this fiscal 1974 funding is for 1974-75 operations.

Ms. HOPSON. No, that chart is done on the basis of the year of operation, the one attached to the testimony.

Dr. PHILLIPS. So actually table II-A is fiscal year 1973 funding and that is 1973-74 operations, and table II-B is fiscal year 1974 funding and 1974-75 operations.

Ms. HOPSON. Right.

Dr. PHILLIPS. We often have those confusions, and it is good to get it cleared up, so it is this year and next year.

Mr. O'HARA. I guess we want to get on to the guaranteed loan program and we may have further questions-I am sure you understand that-which we will direct to you.

We would like to try to work with you to determine the characteristics of the defaulting borrowers to see if there is some way to effectively reduce default rates.

Dr. PHILLIPS. Before I leave the witness table, I would like to deliver to you copies of the new student affidavit form which we have developed in consultation with legal counsel over the last several months and which are now in the hands of the institutions, which we hope, for the first time, will permit a student to fill out a single form and with that form meet his affidavit requirement in basic grants, supplemental grants, work study, NDSL, and guaranteed student loan programs.

I though you would perhaps like to have it now for your reference. Mr. O'HARA. We would appreciate having it.

Dr. PHILLIPS. We are trying to rationalize the operation of these programs and I thought this might be of interest to you. Mr. O'HARA. I thank you. We appreciate that.

Dr. PHILLIPS. Thank you.

Mr. O'HARA. Our next witness is Mr. James W. Moore, Acting Associate Commissioner of the Office of Guaranteed Student Loans, Office of Management, U.S. Office of Education. Mr. Moore is accompanied by Mr. Charles Cooke, Deputy Assistant Secretary for Legislation (Education), Mr. David Bayer, Assistant Director, Office of Guaranteed Loans, and Ms. Alice Hansen, Chief of the Reports Section, Office of Guaranteed Loans.

Mr. Moore, we would appreciate very much hearing from you on the guaranteed loan program.

STATEMENT OF JAMES W. MOORE, ACTING ASSOCIATE COMMISSIONER, OFFICE OF GUARANTEED STUDENT LOANS, OFFICE OF MANAGEMENT, U.S. OFFICE OF EDUCATION, DEPARTMENT OF HEALTH,

EDUCATION, AND WELFARE, ACCOMPANIED BY CHARLES M. COOKE, JR., DEPUTY ASSISTANT SECRETARY FOR LEGISLATION (EDUCATION); DAVID C. BAYER, ASSISTANT DIRECTOR, OFFICE OF GUARANTEED LOANS; AND ALICE F. HANSEN, CHIEF, REPORTS SECTION, OFFICE OF GUARANTEED LOANS Mr. MOORE. Mr. Chairman and members of the subcommittee, it is a pleasure to be here today and to review with you the history and operation of the guaranteed student loan program-GSLP. The following statement is intended to be a brief overview of the program's establishment and operation.

I. LEGISLATIVE HISTORY

A. Guaranteed student loan programs prior to the Higher Education Act of 1965.

During the period 1954 to 1965, 17 States enacted legislation to create State-guaranteed student loan programs. Under these programs,

a guarantee loan reserve fund was established into which State appropriations and/or private contributions were deposited to be used as a guarantee for loans from commercial lenders made to students primarily attending institutions of higher education.

Typically, the interest rate was fairly low, a needs test was required, and repayment of the loan was deferred until the student had completed school. The usual ratio of reserve funds deposited to loan principal outstanding was 1 to 10 but did range as high as 1 to 33. In addition, a State interest subsidy was paid to lenders on behalf of students in both New York and Louisiana. All 17 of these programs are still in operation today.

United Student Aid Funds-USAF-a private nonprofit agency, was established in 1960. Under this program, colleges and universities could make deposits in the USAF reserve fund on the basis of which USAF would guarantee a loan made by a commercial bank to their students at a ratio of 1 to 1212. Some States and private corporations also participated in this plan for the benefit of their residents or employees.

In addition, Wisconsin, Texas, South Dakota, and Florida provided loans made directly to students by the State. The Wisconsin program was established in 1933. The Florida program actually consisted of scholarships made to undergraduates who, upon graduation, were expected to teach in the public schools of Florida. If such service was not rendered, the scholarship had to be paid back as if it had been a loan.

B. The Higher Education and National Vocational Student Loan Insurance Acts of 1965. These two programs authorized by the 89th Congress provided for low-interest, deferred-pay-back, federally subsidized loans made primarily by commercial lenders to students attending institutions of higher education and to students attending public and profitmaking schools both in the vocational and technical education sector.

Loans would be guaranteed by State or private nonprofit agencies or insured by the Federal Government. The acts also extended Federal interest benefits to students receiving loans under direct State loan programs.

The vocational program was a blueprint of the higher education program, with appropriate changes in terminology, and both programs were merged in 1968. The discussion from this point on will deal only with the combined guaranteed student loan program.

Features of the program included a prohibition against a financial needs test for all students whose annual adjusted family incomes were less than $15,000 per year, a maximum statutory interest rate of 6 percent per annum, and a payout period of from 5 to 10 years beginning 9 to 12 months after the student withdrew from or finished school. The Federal Government paid an interest subsidy of up to 6 percent while the student was in school and a partial subsidy of 3 percent during the payback period. Students from families with adjusted family incomes of $15,000 per year or more were also eligible for loans but without the interest subsidy. The maximum loan amount was $1,500 per year with an overall maximum of $7,500.

The legislation was intended to encourage the formation of additional State agency programs, to continue those already in existence,

and where adequate, private nonprofit programs. The direct Federal insurance program was available on a standby basis, to be brought into play only when a public or private nonprofit program did not serve the students in any given State.

To encourage the continuation or formation of State or private loan guarantee agencies, Federal advances of so-called "seed money" were appropriated to create or expand loan guarantee funds within all States. The result was that in 34 States there was a State program, of which 12 contracted with the United Student Aid Funds to administer the program.

In the remaining States, the District of Columbia, and Puerto Rico, the State program was administered by United Student Aid Funds under direct contract with the Office of Education. In both State and Office of Education contract arrangements with USAF, the seed money for those particular States was deposited with United Student Aid Funds. The total appropriation of seed money in fiscal years 1966 and 1967 was $19.4 million, and $12.5 million on a matching basis was appropriated in 1969.

By the summer of 1967, the guarantee capacity in some States had been exhausted due to the total encumbrance of seed money. Since appropriations from these States were not forthcoming, it became necessary in August of 1967 to initiate the Federal program in North Dakota. During the remaining months of 1967 and 1968, additional States exhausted guarantee capacity and invited the establishment of the Federal insurance loan program.

This trend continued until the Federal insurance program operated in 24 States, while 26 State programs were continued. Six of these maintained contract arrangements with USAF. That same administrative pattern exists today.

C. Development of the reinsurance program: Throughout 1967 and the early part of 1968, various committees and advisory groups studied the program to offer recommendations for the solution of two major problems-namely, how to increase the guarantee capacity of the State programs without the additional cost of guarantee funds on the Federal budget and how to increase lender participation in the face of an increasing cost of money, which by 1968 had made 6 percent simple interest an unattractive yield.

In two separate amendments, Congress on August 3, 1969, authorized a rate increase to 7 percent and, effective December 15, 1968, withdrew the 3-percent subsidy during the payout period. Expansion of the guarantee capacity consisted of placing, behind the State and private loan guarantee, an offer of Federal insurance. As a result, the Federal Government would assume responsibility for paying 80 percent of agency losses on the principal amount of loans which went into default.

This had the practical effect of increasing, by a factor of four, the total State guarantee fund deposits already encumbered, whether these came from State appropriations or from allocation of seed money.

For example, assume a State had a reserve or guarantee fund of $100,000 and a reserve ratio of 1 to 10 and that $1 million in student loans had been guaranteed. Under a reinsurance agreement, the Federal Government would assume liability for 80 percent of the losses to be covered by the $100,000 guarantee fund. This would free $80,000

for additional guarantees of $4 million in loans. Twenty-five agencies have signed reinsurance agreements.

The problem of adjusting the yield on the loan to reflect changing money market conditions was somewhat more complicated. There was some interest in allowing the rate paid by the student to, in effect, reflect existing market rates. However, during a period of high rates, student borrowers would be bound during a payout period some years in the future to what then might prove to be a highly inflated rate.

In view of the rapid change in interest rates during 1969, the Congress adopted a special-allowance concept which was designed to provide lenders with an equitable yield after taking into consideration current money market conditions. This additional subsidy was set quarterly on a retrospective basis, providing between zero and 3 percentage points, in addition to the 7 percent, on all loans made and still outstanding after August 1, 1969.

The special allowance has now been paid for 19 quarters and has ranged between a low of three-quarters of 1 percent to a high of 21⁄2 percent during the 2 quarters July to December 1973. These 1968 amendments and the special-allowance legislation contributed immensely to the program's growth during the years 1970 to 1973.

D. Establishment of the needs test: After a brief startup in the summer of 1972, the GSL portion of the Education Amendments of 1972 became effective in March 1973. For the first time, typical financial need analysis procedures were required to determine amounts of loans which would be eligible for Federal interest subsidy.

This resulted in many school recommendations for subsidized loan amounts which either fell below the amounts requested by students or were for a zero subsidized loan. Many students did not apply for subsidized loans because of the needs test requirement and the reluctance of some families to provide the essential financial data.

Loan volume was further diminished by lender unwillingness to make nonsubsidized loans in substantial numbers because of increased administrative costs of billing students for interest during the in-school period as compared with the submission of a single billing to the Federal Government.

Further compacting of loan volume may be attributed to the prevalance of high interest rates which created opportunities for competitively high rates of return to lenders on other types of loans, illiquidity in some lender portfolios, and often the sheer accumulation of student loans in lender portfolios.

In fiscal year 1974, it is estimated that $1.2 billion will be lent in 1 million loans, with an average loan amounting to $1,230. In fiscal year 1972, the last full year in which the preexisting law was in effect, $1.3 billion was lent in 1,256,000 loans, with the average loan amounting to $1,051.

Public Law 93-269, which becomes effective on June 2, 1974, eliminates the needs test for the vast majority of loan applicants. The first wave of informational workshops on implementing the application of this new legislation has already been completed.

Information was distributed throughout the country during the first week in May and we anticipated a reasonably simple and effective incorporation of these amendments into the program on the second of

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