her part-time wage to the student financial aid office. It's not surprising that the present system in fact gives incentive not to work. This counter productivity is compounded when the present law allows the financial aid director to increase the amount loaned to such a student but cannot allow that student to work for it. In the meantime, students able to get along without federal financial aids can get part-time jobs and society pats them on the back for their fine effort. The present requirements stand traditional, proven social values on their head. The Congress must allow students to work to make ends meet above their aid level and stop forcing them into additional indebtedness. The third major problem voiced by the students is the general lack of availability of sufficient funds for the guaranteed loan program. Our present reliance on the private sector is misplaced. At Michigan State, nearly 300 students in less than six months were turned down by at least two banks. As you're already aware, banks are having a hard time making student loans available at current interest rates. Ken Westlake, an M.S.U. student, did some research for me at our local banks. Attached is a copy of his report. In sum, these banks experience the relative unprofitability of lending to students and therefore impose obstacles in front of applicants for guaranteed loans. These include: a student and/or his or her parents must have an account in the bank, sometimes for a specified period of time; the student's family must have a good credit rating; the student must be an upper-classperson, thereby eliminating those attending junior colleges from consideration; or the student must be a graduate of a high school located in the bank's area. These preconditions make the student's task of obtaining educational loans even more difficult. Again, I refer you to the attached summary of local banks' pertinent credit policies. Public Law 93-269 did amend Section 2(a)(7) of the Emergency Student Loan Act of 1969 to extend through the next fiscal year the Secretary of HEW's authority to prescribe a "special allowance" interest supplement beyond the statutory 7% ceiling. However, the existence of such discretionary power does not assure its full exercise. Here in mid-Michigan, according to Mr. Henry Dykema, Director of the Office of Financial Aids at Michigan State University. the special allowance of 22% leaves our banks 12% short of the area's current prime interest rate of 11%. Mr. Dykema agreed that despite the intangible value of the guarantee on student loans, the lower rate of return dispels any illusions that these commitments are justifiable except from a public relations standpoint. He added that the contemplated legislation authorizing a special allowance of up to 4% would not, in his view, be a panacea. Such conditions have forced banks to put their responsibilities to their depositors ahead of student loans. As a solution, the Congress should consider the establishment of educational loan trust funds administered by the states. Such state trust funds could act upon the loan recommendations of colleges and universities while assuming the administrative burdens of collection and accountability to the federal government. Congress would provide funds to the U.S. Office of Education on a demonstration project basis. State trust funds for student loans would be financed on a matching fund formula. There would be spinoff benefits. Federal inspectors would enjoy far easier access to the records of 50 states, as opposed to 5,000 educational institutions which can't be reached on a regular basis. Control by the federal government could be reduced to the bare essentials of interest rates, repayment periods, and non-discriminatory administration. Various loan programs could be consolidated under the direction of the state trust funds, with great savings potential. Loans could be more easily made to students, and on a wider scale as well. Interest rates could be cut, since profit would be eliminated as a component. As repayments gradually begin to offset the outflow of money for new loans, the trust funds will increasingly pay their own way. Federal seed money expendiures will correspondingly diminish and hopefully come to an end. Ultimately, the state corporate trust funds should become completely independent. Obviously, other reforms are important as well. All student loans should be consolidated into a unified program with unified eligibility. Students and loan administrators rightfully compain that the complexity of programs and the differences in eligibility create confusion, misunderstanding, and even anger on the part of students struggling to get financial aid for their education. They need the help of this subcommittee. Policies of Lansing Area Banks-Higher Education Loans AMERICAN BANK AND TRUST OF LANSING (1) Individual or his or her family must have an account with the bank. (2) Prospective college must be an eligible institution (Virtually all Michigan schools are eligible). (3) All levels of students are eligible, but upperclasspersons get priority, as there is a set designated amount of funds earmarked by the bank for the program. BANK OF COMMERCE OF LANSING (1) If parents claim the student as a dependent, the family must reside in the Lansing area for two consecutive years. If the student is independent, he or she must be a resident of the Lansing area for two consecutive years. (2) A student in any grade level is eligible. (3) If student has declared a need, he or she needn't have an account with the bank. If student has not declared a need, he or she is required to maintain a checking account with the bank to facilitate easy withdrawal of interest payments. BANK OF LANSING (1) Parents are usually customers of the bank ("The loan is a goodwill gesture"). Student must be a customer. (2) Student must be a sophomore or higher in standing. (3) Loan must be used at an institution in Michigan. MICHIGAN NATIONAL BANK (1) Student or his or her parents must be a deposit customer of one year or more. (2) Student must be at least a junior at a four-year institution or a secondyear student in a junior college. (3) The bank has not made any loans to students who had not previously taken out loans with it since August of 1973 because of high interest rates. FIRST NATIONAL BANK OF EAST LANSING (1) Student or his or her parents must be a one-year customer. (2) Local high school graduates are preferred. (3) Student must be a junior or higher. (4) No loans to students who had not previously taken out loans with it have been given in several months because of high interest rates. EAST LANSING STATE BANK (1) Student or his or her parents must be a customer of the bank. (2) Student must be a local high school graduate. (3) Freshmen loans are one term at a time to avoid students getting tied to a long-term debt. (4) No loans to students who had not previously taken out loans with it are now given because of high interest rates. Jackson Area Banks MIDWEST BANK Student or parents must have an account. NATIONAL BANK OF JACKSON Does not participate, although it once did. CITY BANK OF JACKSON Each school is allotted certain amounts to be loaned and no more after that amount is exhausted (in some cases not enough loan money has been set aside for all individuals who need it). STUDENT FINANCIAL ASSISTANCE (Student Loan Programs) WEDNESDAY, MAY 29, 1974 HOUSE OF REPRESENTATIVES, SPECIAL SUBCOMMITTEE ON EDUCATION OF THE COMMITTEE ON EDUCATION AND LABOR, Washington, D.C. The subcommittee met at 10 a.m., pursuant to recess, in room 2261, Rayburn House Office Building, Hon. James G. O'Hara (chairman of the subcommittee) presiding. Present: Representatives O'Hara, Lehman, and Dellenback. Mr. O'HARA. The Special Subcommittee on Education will come to order. This morning, the subcommittee continues its hearings on the loan component of the student financial assistance package. Before turning to our witnesses, I would like to put a success story in the hearing record. Last month, action by this Subcommittee and our counterparts in the other body led finally to the enactment of Public Law 93-269, by which the needs analysis required of applicants for interest subsidy under the Guaranteed Loan Program was removed for families with adjusted incomes of $15,000 or less. While none of us expected that change in the law to remove all the problems families are having in securing loans for their kids' college costs, it was very gratifying to me to receive this week a letter from one citizen who has already been able to benefit from the provisions of that new amendment. I ask unanimous consent that the letter from Mr. Rudolph Pearson of Worcester, Massachusetts, be made a part of the hearing record at this point. (The letter referred to, from Mr. Pearson appear on page 110): We began this segment of our hearings yesterday with testimony from Dr. John Phillips and Mr. James Moore of the Office of Education who spoke about the history and status of the national direct student loan program and the guaranteed loan program, respectively. The subcommitee has, of course, been involved in looking at the guaranteed loan program in the immediate past, having held the hearings which culminated in the enactment on April 18 of Public Law 93-269, legislation to liberalize access to interest-subsidized guaranteed loans. But at the time that particular legislation came before the House I reiterated my belief that we had to take a long-range look at the whole loan program as a part of these proceedings. In the material which has been placed before the members of the subcommittee and I ask unanimous consent that these documents be (53) printed at an appropriate point in the hearing record, I have directed the staff to place a compilation of the legislation dealing with loan programs. I have also obtained from the National Council on Higher Education Loan Programs a copy of its issue paper of last fall which discusses in considerable detail, many of the problems we will have to consider in the course of our work with title IV. The text of that paper can also be found in the printed record of our earlier loan hearings. We will hear today from several witnesses who have been asked to speak from their experience in the operation of loan programs. We will begin with Mr. Lucius P. Gregg of the First Chicago University Finance Corp. Mr. Gregg, we would appreciate it if you would step forward and take a place at the witness table and give us the benefit of your experience in the operation of the program. STATEMENT OF LUCIUS P. GREGG, JR., PRESIDENT, FIRST CHICAGO UNIVERSITY FINANCE CORP. Mr. GREGG. Thank you very much, Mr. Chairman. I am pleased to be here and to have this opportunity to make a few comments regarding our experiences with the student loan program. I would like to, with your permission, ask that my letter of March 21 be used as a letter of record and what I would like to do in a few minutes if I could, is to comment on some of the items raised in the letter and to add whatever additional information might be appropriate. Mr. O'HARA. Mr. Gregg, without objection, the text of your March 21 letter will be inserted in the record at this point and printed in full in the record and we appreciate your comments. Mr. GREGG. Thank you very much. [The letter referred to follows.] Hon. JAMES G. O'HARA, FIRST CHICAGO UNIVERSITY FINANCE CORP. Chicago, Ill., March 21, 1974. Chairman, Special Subcommittee on Education, House Committee on Education and Labor, U.S. House of Representatives, Washington, D.C. DEAR CONGRESSMAN O'HARA: I am writing as a former university administrator, and now a banker, regarding the problems facing the Guaranteed Student Loan Program. My most recent view of this program is based primarily on efforts at First Chicago University Finance to assure students better access to guaranteed loans. During the past year, we have sought to assist approved college and university lenders by providing the funds and loan servicing to meet their student loan needs under government guidelines. Our arrangement now encompasses 20 major colleges and universities for loan commitments of $20 million to meet this year's needs. During calendar year 1974, we will seek to assist 50 colleges and universities for annual amounts of approximately $50 million to be used starting with the fall academic year. For those who choose, we also stand ready to service their student loans through billing, collection, and loan accounting. As you know, in the last few years an increasing number of higher educational institutions (160 to date) have sought and received approval to lend under the FISL Program. A few have preferred to use in-house funds and loan servicing capability. Other institutions have chosen instead to borrow funds if suitable arrangements could be made, and to contract for loan servicing, if this course could better meet the standards of professionalism, reliability, and cost. For many schools, the ability to lend is a necessity and not a luxury since they are increasingly dependent on tuition to meet yearly expenditures. Student financial aid is a major source of tuition for the moderate and lower income students they seek to educate, and the GSL program is rapidly becoming a |