Government: Take 500 students who would be eligible for either NDEA or guaranteed student loans, say $10,000 family income, and assume that each one borrows up to the thousand dollars a year under NDEA and in a second computation, assume each one borrows a thousand dollars a year under the guaranteed student loan program for each of 5 years. Consider the repayment over a 10-year period. What would be the total cost to the Federal Government over a 15year span of $500,000 under each program.

(The information requested to be furnished follows:)

Hon. EDITH GREEN,

THE UNDER SECRETARY OF THE TREASURY,
Washington, D.C., October 30, 1967.

Chairman, Special Subcommittee on Education,
House of Representatives,
Washington, D.C.

DEAR MADAM CHAIRMAN: This letter responds to the request you made for certain comparisons between the insured loan program under the Higher Education Act of 1965 and the direct loan program under the National Defense Education Act.

First, you requested a comparison of the total long-range costs to the Federal government of loans made under these two loan programs to a hypothetical group of 500 students, each of whom borrows $1,000 a year for four college years and takes the full ten-year period of time permitted for repayment.

I am enclosing a table showing these comparative costs. In accordance with our usual practice, this analysis represents the marginal cost to the government, including the cost of borrowing by the Treasury, discounted to arrive at present dollar-value totals.

In this model, the cost under the existing NDEA program would be somewhat higher than the cost under the insured loan program with the placement and conversion fees that have been recommended by the Administration. If the "teacher cancellation" feature of the present NDEA program were eliminated, the cost under NDEA would be slightly less than under the insured loan program. Although in the long-run such a direct loan program would be slightly less costly to the Federal Government than an insured loan program with comparable terms, the direct loan approach involves substantially higher immediate expenditures by the Federal Government. It is clear that, in light of the extraordinary demands on the Federal budget, it would not be possible, as a practical matter, to achieve the same volume of student loans through a direct loan approach as we can achieve through the insured loan approach.

Also, we believe that continuation of the insured loan program is very much warranted in light of the fact that we are moving into a novel area in which it should be beneficial to obtain further experience with alternative approaches to the important problem of financing student education expenses.

You also requested a comparison between the provisions for reimbursement of administrative expenses under the NDEA program and the Administration's proposal for payment of placement and conversion fees under the insured loan program. I am enclosing a memorandum that sets forth such a comparison.

It is important to recognize that the two arrangements serve somewhat different functions. The NDEA plan provides the sole Federal funding for the administrative costs incurred by the colleges in operating the loan program. The proposed placement and conversion fees, on the other hand, merely would make up the difference between lenders' interest income and their total costs, in which administrative costs are only one element. If other costs, such as the cost of money to the lenders, should decline, the interest income would be more adequate to cover lender costs, and the placement and conversion fees would be reduced or eliminated. I am enclosing a table showing the varying placement and conversion fees at various levels of the cost of money.

I hope that this information will be helpful to the Subcommittee.

Sincerely yours,

JOSEPH W. BARR, Under Secretary of the Treasury.

ATTACHMENT A

COMPARISON OF RELATIVE FEDERAL GOVERNMENT COSTS FOR NDEA AND GUARANTEED STUDENT LOAN PROGRAMS, PRESENT VALUES IN DOLLARS 1

1 Based on costs incurred by Federal Government for 500 students borrowing $4,000 each with 10 year repayment cycle 5% percent discount rate. Present value is the standard method used for comparing 2 or more streams of receipts and pay ments which have different time patterns. It is based on the concept that a dollar at some time in the future is worth less than a dollar today. Neither calculation includes the cost of any defaults.

2 With proposed reinsurance pain; under present funding of insurance reserves, with 50-50 matching and no reinsurance, the Federal insurance reserve cost would be $29,710.

3 Elimination of the cancellation feature would reduce the NDEA total cost to $464,394. Addition of a comparable cancellation feature to GSLP would increase the GSLP total cost to $828,972.

ATTACHMENT B

COMPARISON OF DIRECT COST ALLOWANCES IN NATIONAL DEFENSE AND GUARANTEED STUDENT LOAN PROGRAMS

I. NDEA STUDENT LOAN PROGRAM

The statutory ceiling on the amount a college may withdraw from the Loan Fund to cover administrative costs is 1 percent of the aggregate loan volume outstanding at the end of each fiscal year, or one-half of reasonable administrative costs, whichever is the lesser.

For 1965-66, half of the institutions operated under the 1 percent outstanding balance rule, and the remainder one-half of reasonable cost. The amount of administrative payment per loan made during the year averages at $26 per loan in the 1 percent category and $13 per loan in the one-half of reasonable cost category.

II. GUARANTEED STUDENT LOAN PROGRAM

The proposal now before the Congress is to provide fee payments to lenders at the time each annual loan is placed on the books and at the time the "in-school" notes are consolidated and converted to installment payout notes.

The amount of the fee in any given year would range from $0 to $35, depending upon the cost of money or the net return on alternative investments. At present, the fee is estimated at $25 for both placement and conversion.

The fees, when payable, generally would constitute only a portion of the revenue available to lenders to cover administrative expenses; so long as the cost of money is less than the 6 percent interest received by lenders, some portion of the interest income can be applied toward administrative expenses. The $25 fee used in the following comparison assumes a cost of money of approximately 52 percent, leaving 1⁄2 percent to cover a portion of administrative expenses. It should be noted, however, that although this 1⁄2 percent is revenue to the lender, it is not a cost to the Federal government except in the case of students qualifying for interest subsidies; in other cases, the cost is borne by the stu dent. (Under the NDEA program, all of the administrative payments are costs to the Federal government.)

III. COMPARISON

Since NDEA cost data is available only for FY 1966, and the Guaranteed Loan fees are only in the proposal stage, there is no effective experience base for direct comparison. However, it is possible to use the actual average loan in each program to show parity of treatment.

For calculation of NDEA administrative expense, 10.5 percent of the face of the note will equal the amount of overhead earned by the loan over a 15-year period.

In the guaranteed loan program, each loan earns a placement fee and, assuming each student makes at least two loans, one-half of the conversion fee. In addition, one-half percent per annum from interest payments on the reducing balance is available to cover the lender's costs.

The following examples are based on actual average annual loans of $600 in the NDEA program and $800 in the Guaranteed Loan Program. Each loan is held over a four-year in-college period and a year of grace, and is repaid over a ten-year period.

A. NDEA Loan

A $600 NDEA loan will yield $63 in administrative support to the college (10.5 percent of $600).

The same loan, under the Guaranteed Loan Program will yield $69 in administrative support for the lender:

Placement fee_

2 of the conversion fee___

2 percent interest on balance1.

Total

B. Guaranteed Student Loan

An $800 loan will yield $79.50 in administrative support for the lender: Placement fee____.

$25.00

12.50

31.50

69.00

$25.00

12.50

42.00

79.50

1 Paid by the Federal Government only if the student qualifies for interest subsidies. The same loan, made by a college under NDEA, will yield $84 in administrative support.

ATTACHMENT C

COST OF MONEY AND FEES

Based upon current estimates of lender costs other than the cost of money, and the proposal for equal fees (a) each year that a loan is put on the lender's books and (b) for each conversion of a borrower's loan (s) to repayment status:

Mr. GURNEY. Mr. Barr, getting back to this question I asked earlier as to whether we might talk about a partial repayment of the interest at least in a tax deduction, of course, I know your attitude on it but I would like to pursue it a little further. It costs you some money to supervise these interest figures anyway, does it not, that is whether they are going to pay 3 percent or 6 percent? You have to make some sort of surveillance of income tax returns. How do you handle that?

Mr. BARR. They do it rather simply. The computation is made in the bank. They only have to make two computations, take 10 percent of the gross income and then throw in their exemptions.

Mr. GURNEY. If an income tax credit were given for the repayment of the interest on these loans, it would not cost you anything to service it, would it?

Mr. BARR. No, it would not cost anything to service it but, Mr. Gurney, here again I must be very parochial. Forty million Americans pay taxes on an IBM card. We don't have any more room on that card for any more lines for credits or anything else.

Mr. GURNEY. Is that the only reason why you oppose it?

Mr. BARR. I told you we were parochial in this area. When people say, "Why don't you have a bigger card?" Well, it won't fit in the IBM machine, and that is the reason we don't have a bigger card. You would be amazed. I know it sounds amusing but there are a lot of people in this country who have difficulty paying their taxes. We have an extremely effective tax system.

Mr. GURNEY. I agree with you there.

Mr. BARR. It is hard to work through the mathematics. We have a simple little form and we go through the roof every time anybody is going to add a line to the form. That is one major objection we have. Mr. GURNEY. One last question.

Mr. Muirhead, you mentioned in a colloquy with Mrs. Green, I think it was, about the poor record of some of these colleges under NDEA. Mr. MUIRHEAD. That is right.

Mr. GURNEY. I think you mentioned a figure of 40 percent as far as one institution is concerned.

Mr. MUIRHEAD. Yes.

Mr. GURNEY. What measures does Uncle Sam take to insure that this experience might be better than 40 percent?

Mr. MUIRHEAD. We take continuing and rather vigorous measures to help colleges of that kind. I did state there was a college with 40 percent. It is completely atypical. But we do send our regional representatives to that institution to work with the financial aid officer and business manager hoping that they will develop a better method of collection. The very poor collection rates are in those colleges where their own resources are quite limited and where they do not have welltrained business management officers.

Mr. GURNEY. Is your assistance productive of results?

Mr. MUIRHEAD. We can point to results since we have been pursuing this for the past 5 years. The program has been in operation for 9 years. The collection problem started to emerge after about the first 4 years of the program. We can point to an improvement in the collection rate in the college and universities.

Mr. Howe. I will say here we are exactly in the same position as Mr. Barr is on the collection of the income tax. I assume that as he puts on additional personnel to check on individual income taxes that he produces a higher rate of return to some degree.

Mr. BARR. Eight to one.

Mr. HowE. We are exactly in the same position in checking on colleges. I can't resist the opportunity to mention the fact that our effort to build up the regional organization of the Office of Education is to get people near the colleges so that they can work on a regular basis with people in the colleges who are not handling these kinds of problems as they should and we are having difficulty building that regional

organization partly because of the fact that the Appropriations Committee of the House of Representatives has taken a position that we should slow up on that.

Mr. GURNEY. If they stuck to the financial field, probably Congress would not object so much.

I have no further questions.

Mrs. GREEN. Any further answers?

Mr. Erlenborn.

Mr. ERLENBORN. Let me first observe. When you were talking to Mr. Barr about the complexity of the income tax form I am reminded of the little box in the corner which says, "Do not write in this space." I wonder how many people have, as I have heard one income-tax payer did, written in there, "I will write in here anything I damn well please." You don't have to answer that.

I would like to ask Commissioner Howe a question and I will phrase this as quickly as possible.

The work-study program, as you know, has been 90-10 matching. The present law provides that this month it will go to 75-25. There is, as you know, legislation which has passed the House which would change that to 85-15 for this year, 80-20 the next year, and 75–25 the year after. Can you tell me, if it is 85-15 this year, will you manage the program so that you will work within the $140 million appropriation that will be available or is it anticipated that you will ask for additional funds?

Mr. Howe. It is not anticipated that we will ask for additional funds. I will ask Mr. Muirhead to comment further on the management of the program.

Mr. MUIRHEAD. We feel that the program at the present level and with the matching that has been passed by the House will not result in a reduction of the program. By and large the 85-15 matching will be a much better type of matching for many institutions that have had some difficulty meeting even the 10-percent matching. They would have had increased difficulty meeting the 20-percent matching or the 25-percent that would have gone into effect on August 20. We do not plan to come forward with any request for additional funds in the work study program.

We believe that the 85-15 matching will in very large part allow the program to continue at about the level it has been.

Mr. Howe. It is certainly obvious that an 85-15 matching would have more total funds available than under 90-10. You can either service more students or have more funds available for the individuals. Mr. MUIRHEAD. Yes.

Mr. ERLENBORN. Congressman Bow stated on the floor of the House that he had information from your office that you would be asking for some additional $18 million. That is why I asked the question. I don't know where he got the information or whether it did come from someone in your office.

Mr. Howe. I may not be aware of something that is under consideration, but I don't believe we are planning to ask for additional funds. Mr. MUIRHEAD. We are not planning to ask for additional funds. I don't know where he got the information but the information does not represent the Office of Education position.