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that this is the time to cope with this problem and let us get on and do something about it.

As far as the loan program itself, as I mentioned before, I think it is absolutely essential that we revise these programs. They are too costly. No matter how you calculate it, with the current interest rate, there is no question in my mind that the cost of a $1,000 loan program over the life of that loan program will easily cost the Federal Government a $1,000. Certainly, the default rate is a problem, and it is a problem we should cope with and try to do something about, but the cost of this program is not in the default area. The cost of this program is in the interest rates and mostly in the supplemental interest rate that the Federal Government is now paying the banks.

As I mentioned before, the program is too complex, and another point that was brought up over and over again this morning is the program is inequitable. It is very easy for people to state that the Federal Government does not have quantifiable data to support change. However, the Federal Government does have quantifiable data to support inequity, and we have enough evidence to prove the point.

There is enough evidence. The banks in the District of Columbia chose to provide only $1 million worth of loans for the students in the District. The Federal Government took that program over, and the last time I saw a count, we already gave over $10 million worth of loans in this area.

There are banks in this country who will not give loans to freshmen, for example. There are banks in this country who will only give loans up to $1,500. There are banks in this country who will not give loans at all. Certainly, it is spotty.

As far as the changes, be it the administration's bill or the Kennedy-Bellmon bill, I believe we need a basic loan program which is need-based. One of the problems with the loan program is that they are not need-based today, and that is why I think they have a possibility of getting out of hand.

In the need-based loan program, the interest should be subsidized just as NDSL or GLS is now subsidized. Students should not have to pay anything back until such time as the student finishes school as the present program requires, and then the student should pay back the loan over an extended period.

I think it is incorrect to continue the 3-percent interest rate. We have not had a 3-percent interest rate in this country for 20 years. We are now talking about, as of this morning, a prime rate of 141⁄2 percent.

How could one justify, at this juncture, to continue a 3-percent rate regardless of the emotion. It is not a real number any more. We ought to have some rate that is more realistic.

Regarding the supplemental loan program, it should be subsidized, in my opinion, as the administration and the KennedyBellmon bill presents, and I would like to suggest a modification to this.

In the supplemental loan program, I would suggest that we discontinue or reduce significantly the supplemental interest we pay lenders. I say this, and you must understand in my present position, Mr. Chairman, I work with banks, and this is going to

make them all very unhappy, but this is what I think ought to be done.

I have now been at many bank meetings all over the country, various association meetings and talking to many bankers, the student loan is the best loan banks have today. They make more money on student loans than on car loans, revolving credit loans, et cetera.

I would suggest in the supplemental loan program, that, if we have a supplemental interest at a flat rate, perhaps, 22 percent, and then gave the banks an origination fee for making the loan, and that is all. Now, this would work well if this were coupled with a strong Sallie Mae rather than an over cautious, immovable group as Sallie Mae now operates. Sallie Mae should go in and buy out these loans as soon as they are made, if the bank desires. We would be in a position that banks would be interested in making the loans and providing the capital, providing Sallie Mae came in and bought them out as soon as they were made, which, by the way, Mr. Chairman, is the exact plan we have right now going in the District.

The way the District of Columbia Federal program works is that the student comes in, gets the loan and a bank provides the capital, and Sallie Mae comes in and buys out the bank immediately. Sallie Mae pays this bank an origination fee.

Let me just try to go through a very brief scenario as I see it. Let us take an example of a school that cost $5,000 as a cost of education, and let us say, in this example, the family contribution requirement would be $1,000, and let us say that the grant, be it BEOG or other grants that the student would be entitled to, would be another $1,000, and let us say we did have a work component where the student was required to contribute $900.

This would mean that of the $5,000 that the student needed to attend that school, he or she would have $2,900 between the family contribution, the grant and the work. At that point, the student still needs $2,100 based on a need analysis. That particular student, in my opinion, should get a subsidized loan and need not pay it back until he or she finishes school and then start paying it back on an extended period.

Let me go back to the $2,100. The way the $2,100 should be obtained to that student, that student should be able to go to the financial aid administrator. The financial aid administrator ought to make the decision to give that student the $2,100, and that student should not have to shop or do anything about getting that loan, similar to the way the NDSL program is run today.

That is the program that I would suggest we have. I would also suggest that those institutions that want to continue to collect on the basic loan should be able to continue doing that, if they think it is in their best interest to collect that $2,100.

For those institutions who will not collect the $2,100, then this new agency, the new Sallie Mae agency which I would like to talk about, would then be responsible for collecting the money for the institutions.

Regarding the $1,000 family contribution, let us say that this particular family cannot contribute the $1,000 because they just do not have $1,000. The supplemental loan program would permit that

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family to borrow $1,000 and here, too, we ought have a system where the parents or the students could go to the financial aid administrator and be assured that they will get that $1,000. They should not have to shop around. We ought have a system that insures that person getting their $1,000.

This particular loan, however, would not be subsidized. The interest rate would continue on this loan. However, the parent, in order to provide some cash flow to this family, would not have to pay any of this loan back until such time as the student is out of school, and at that time, they would have a long-term payment proposition which would include the $1,000 plus the accrued interest that would have amounted while the student was at school. In the supplemental loan program, we could continue having the States stay in this program—and some of these States are doing an excellent job.

In those States where the State does not prefer to continue in that pattern, this new Sallie Mae agency could take over, but I would make it a proviso that any State that wants to participate in the supplemental loan program must guarantee that everyone in that State who needs the supplemental loan will get the supplemental loan.

Mr. Chairman, when the BEOG program was presented, the educational community was up in arms about it, and it was because of your leadership and this committee's leadership that despite the educational community's objection to the BEOG program, we pushed through a BEOG program, and now it is one of the greatest programs we have in Government. As you know, in some quarters, it is still referred to as the Pell grant program.

I think it is time now to take the same strong leadership in the loan program and perhaps also call it the Pell loan program, and get on with a loan program that makes some sense other than the one we now have.

Regarding Sallie Mae, I feel very strongly that the Sallie Mae organization must be changed because there is a basic problem with the way that organization is administered. The basic problem is that Sallie Mae, a profitmaking organization, has profit as their primary objective. Secondarily only are they out to support the program. They will only support the program when it increases their profit, and if it is not profitable to Sallie Mae they will not support the program. Furthermore, Sallie Mae is a very difficult organization for bankers to deal with because they are stilted, overcautious, and even in bankers' terminology, "they are more cautious than bankers."

The problem with Sallie Mae is that their company objectives must be consistent with the student aid program objectives, I believe the Kennedy-Bellmon bill is a good approach, which is to make Sallie Mae a not-for-profit agency reporting directly to the Secretary Of Education to insure that someone has control over that organization and to insure that that organization is supporting the programs. I think if we do not do that, Sallie Mae is building a track record of profitability, and comes 1982, they will then sever all ties with the Department of Education. At that time, they will do what best fits their profitability and not for the support of the program.

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I have nothing against profitability. However, I do think it is inconsistent to have a program such as Sallie Mae which is supposed to support the student aid programs and to let them operate in a profitmaking mode.

I would like to add a few comments about the basic grant program. There is no question, I think, in anyone's mind that we are in a situation where we have budgetary constraints, and I think before we start making major changes in the basic grant program, we ought start separating very clearly those that are absolutely essential and priority items from those that would be niceties. As I said earlier, I think it would be a mistake to make lots of changes in this program which would significantly increase the cost. MISAA was a great step forward and has served this country well. It has also now put us in a position that any change we make in tax rates is going to be expensive, and therefore, one must make these changes in this program with caution. If one does not make these changes cautiously, I think that the low-income persons will be the ones which will be impacted adversely.

The changes I would suggest in the MISAA programs is first to increase the $1,800 to some more reasonable number. The $1,800 maximum would have been in effect for 3 years and inflation has clearly eroded that number.

I think that programs ought to be indexed, so that at least that maximum stays pace with what is happening out there. I know the Office of Management and Budget does not like this.

Indexing is an expensive thing to do, admittedly, but it seems to me that has to be classified as one of the essential items.

Another area where I think we have do to something is the adult independent student. There are more adult independent students going to school now than ever before, and every indication is that there will even be more adult independent students in the future. We need to adjust their tax assessment rate.

The administration submitted a family contribution bill which makes some improvement. I think we ought to go further in changing that tax assessment rate. That, too, is an expensive proposition I believe those are the only two items, in my opinion, that ought be changed because they are essential and they are important, even though they are costly.

I think it would be nice to reduce the home residence requirement, but I do not think the we can afford that in addition to these other two changes previously mentioned.

I believe it is a mistake to tamper with the half costs. Raising the half costs, is expensive. Furthermore, it is unnecessary. For example, the low-income student, going to a low cost school, say, a $500 tuition school, ends up now under half cost with a $1,000 grant, this means that the student pays the $500 tuition and has $500 cash payable to him. You eliminate the half cost and that means the student will have even more than $500 payable to him directly. I do not think that student really needs that additional


Furthermore, the most important disadvantage of tampering with half costs is that it will tend to motivate this low-income student to attend a low-cost school. That is the school where that

student will get most money in cash, and that is not in the best interest of the program.

The sixth recommendation I would like to suggest for your consideration is that we must have a single form, single need analysis. It is clear that that is one of the big problems out there, the complexity, and this, in my opinion, would go a long way to simplifying the program.

The seventh point I would like to make is as follows. The House bill includes the recommendation that we have a study of the Bureau of Student Financial Assistance. Mr. Chairman, that Bureau has been studied to death. It has been investigated more frequently than needed. Everybody has studied the Bureau of Student Financial Assistance. We have to let those people get back to work and stop studying them.

A study is usually a way to defer making a decision. We have two major ways in Government to delay actions when we do not want to make a decision. First, we call in a consultant to do a study or we say there is not enough quantifiable data.

Mr. Chairman, I thank you for this opportunity. Student financial aid is the major Federal program to support higher education in this country today. It has made significant strides under your leadership and this committee's leadership, and I just feel that it is important that we continue in this direction.

Thank you very much.

Senator PELL. Thank you very much, Mr. Kornfeld, for an excellent statement, courageous statement, valedictory although postvaledictory. I can assure you we are going to peruse carefully your thoughts, admonitions, and ideas.

I think you started out by saying there are eight points you had and you only give us seven. What was the eighth?

Mr. KORNFELD. I should have said seven. I only had seven.

Senator PELL. Thank you. I think they all make a great deal of sense, and I particularly like your last one. I agree with you that we have too many studies, too many reports, reports that nobody reads, and whether we will move on this, whether the time is right, I do not know. But we will take your views very much into consideration.

It is, as you know, always easier to leave things as they are than to change them, but perhaps the time has come for some pretty substantial change, and the parallel view of both the administration and the Kennedy-Bellmon bill might indicate that would be one of the paths we might go down and in so doing incorporate some of your ideas.

I agree with you, too, that we need to give the people who are doing the work the time to work out the kinks in the organization and structure and the opportunities to be change them when change is needed.

My staff prepared some months ago a table concerning the loan programs, the seven loan programs. Without objection, I will have that inserted in the record at this point, because there should be some ways of combining those, particularly when on this committee there Senators who are either in charge of subcommittees or committees setting up these other loan programs. But again, it may be too logical to move ahead, but we will see.

[The table referred to follows:]

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