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Mr. DAVIDSON. Mr. Chairman and members of the subcommittee, I am vice president and senior installment loan officer, National Community Bank of New Jersey, Maywood, N.J. and a member of the American Bankers Association Installment Lending Division's Advisory Board. The American Bankers Association is a trade association with a membership of over 90 percent of the more than 14,000 full-service banks in the United States. I appreciate this opportunity to present my views on behalf of the American Bankers Association.

If I may, Mr. Chairman, I would like to restrict my remarks to only those portions of the Higher Education Act dealing with student loans. At the onset, I believe it is important to note that the American Bankers Association does wish to state for the record the support of its membership for the present guaranteed student loan program with only those amendments as are necessary to provide for its reauthorization. The association would also like to offer its strong support for the bill recently ordered reported from the House Committee on Education and Labor to reauthorize the Higher Education Act. This bill accomplishes the important goal of continuing stability within the student loan programs necessary to encourage even greater lender participation. It also provides incentives for program expansion, thus truly benefiting the needs of those students requiring financial assistance.

Over the past several months, we have seen legislation introduced in both the House and the Senate that would make substantial modifications in the present loan programs to the extent that they would almost totally restructure a mechanism that is only now fulfilling the farsighted goal of the Congress to make higher education available to all qualified students. These proposals come at a time when actions taken by the Congress in implementing the Middle Income Student Assistance Act are only on the threshold of truly being tested.

The Education Amendments of 1976 provided what are considered by many to be monumental steps toward working out the inequities that existed between State and Federal programs, and generated renewed vigor and support for the guaranteed student loan program as a whole. The present law represents, for the most part, an ideal mixture of Federal, State, and private sector activity. Close personal working relationships have been gained by decentralizing the program, inducing private lenders to provide the program with new highs in annual loan volume.

Perhaps even more significant, from the standpoint of the private lender, is the fact that such actions by the Congress in passing the 1976 amendments, the Middle Income Student Assistance Act, and most recently the technical amendments removing the ceiling on the special allowance paid to lenders under the guaranteed student loan program, have given lenders some encouragement about program stability. That is why I implore this subcommittee not to perform major surgery in its reauthorization activity. What is required, above all else, is program stability-time for already

enacted program modifications to take hold. A major overhaul at this juncture would be both shortsighted and wasteful. One need only to look at the results of the success brought about by these past initiatives to see their benefits-every State is reporting substantial increases in volume of loans and the number of guaranty agency States has risen from 26 to 41. In my own State of New Jersey alone, the student loan volume during the past 3 years has increased from $65 million to $85 million, again $113 million to $147 million; or roughly 30 percent each year.

In all likelihood, all of the remaining nonagency States will implement programs over the course of this Congress as they further witness the success in guaranteed student loan programs. I firmly believe that program expansion is inevitable and will continue to encourage private lender participation.

However, I am concerned that the mere suggestion of a centralized student loan bank, a huge tuition assistance fund, and last resort Federal assured access facilities run by the Office of Education, similar to the District of Columbia program, serves only to confuse and even discourage further expansion and lender participation. Consequently, there are areas in the remaining nonagency States where lenders, recalling their poor experience with the Federal insured student loan program, are not inspired and where a general lack of understanding remains. However, I believe that this reluctance will be overcome if this body acts to further insure program stability.

Perhaps the single most recurring concern regarding student loans relates to loan availability. Certainly the questions raised about loan availability are of great concern to anybody who has been actively involved in this program. Here again, I must refer to those areas of the country that have operated under the centrally run federally insured student loan program. In these areas there are, in fact, still signs of limited and unreliable access to student loan capital, resulting from lenders' disenchantment with the Federal Government's administrative shortcomings. Such pockets of limited access, however, must not misrepresent the excellent relationships that lenders are experiencing with State and private agencies. We must further strengthen the participation in States with guarantee agencies, encourage the expansion of the State agency approach in the few remaining nonagency States, and educate lenders in these States about the guaranteed student loan


One approach to insure adequate student loan capital availability, that is taken by many State agencies, including my own State of New Jersey, is the identification of so-called lenders of last resort. Under this approach, the State agencies have entered into agreements with certain private lenders who stand ready to make loans to any and all students referred to them by the lender―― Senator PELL. I wonder if you could highlight your testimony so we could get on with questions, because I think in the testimony you just read it does not make the same dent on the committee as if the points are highlighted one, two, three, four. What do you think is important, what is wrong. These are the questions we are really after, and I hope the witnesses will address these questions.

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I do not want to cut anybody off, but I am really interested in which programs you support, what you see wrong, what we can do. Mr. DAVIDSON. Well, we presently support the bill as structured, and also support Senator Williams' bill. As far as I am concerned, in my home State of New Jersey I see nothing wrong with the bill as it is right now.

We have, in my own bank, some $14 million in student loans. We have over 2,000 students on a repayment, and over 2,000 students attending classes right now.

Senator PELL. I think the Kennedy-Bellmon approach and the administration approach would save a good deal of money. Let me ask the staff. What are the estimate?

We are working out the figures, but I think one advantage is saving the taxpayer, and that is an important advantage.

Mr. DAVIDSON. Where would that savings be realized, Senator Pell?

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Senator PELL. It would be because the terms

. Mr. DAVIDSON. Would not the savings be going right back in administrative costs? You have 14,000 commercial banks in place right now with facilities to administer this program.

Senator PELL. I think Mr. David Mundel yesterday brought out what the administrative costs were; $250 million, I think, was the figure mentioned. Is that correct?

Ms. DICKINSON. The HEW estimate of cost savings over 5 years was $245 million, and no estimate of administrative costs allowed. So my guess was there would be very little savings, as estimated by the administration.

Senator PELL. I think most of the difference is in the interest rates, as well. All of the suggested changes would mean a greater saving for the taxpayer.

Mr. DAVIDSON. I think you have to keep in mind some of the interest charges that the banks receive from the student loans are paid back to the Federal Government in the form of taxes.

Senator PELL. That is correct. That applies to any education program. But what would be your reaction to banks receiving a standard application processing fee, rather than a special allowance? The banks could immediately sell the paper to Sallie Mae. What would be your reaction to that?

Mr. DAVIDSON. If we could get a standard interest rate, it would be all right with me. If our interest costs were standardized, as well, it would be all right, but your costs are continuing to rise, as well. Right now the discount rate is 12 percent. That is the dollars we have to fund these programs with.

Senator PELL. There has to be indexing, because we hope the interest rates will not remain what they are now. There is no reason they will not be back to 5 percent.

Mr. DAVIDSON. Hopefully.

Senator PELL. What is the situation in communities where students have difficulties getting loans? Is there a lender of last resort always available or not?

Mr. DAVIDSON. Yes. In my area, there is. I have not heard of any students who have been turned away, whether customers of our bank or not. We operate in five northern counties in New Jersey. We have made student loans in the southern part of the State. În

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fact, we have quite an advertising program scheduled for the first quarter of this year, to attract students to our bank, and see that as an excellent marketing tool.

On a voluntary basis, we look for them.

Senator PELL. Would you submit for the record a rough percentage figure as to the amount of money that is loaned to students, as opposed to the amount of money loaned out in commercial loans in your bank or your State? What would be the ratio, roughly?

Mr. DAVIDSON. In my own bank, it would be 10 percent of our total installment loan portfolio. It is a little less than 10 percent. We have a portfolio of $120 million. We have outstanding over $13 million in student loans right now.

As far as the State is concerned, Senator, I would like to supply those statistics at a later date, for accuracy purposes.

Senator PELL. With that 10 percent in your bank, there would be no defaults?

Mr. DAVIDSON. If diligence is followed, yes, no defaults.

Senator PELL. Of the other 90 percent, what would be the default rate?

Mr. DAVIDSON. The delinquency right now in the student loan program, right now, is running about 3.2 percent. On the other portfolio, it would be 1-percent delinquency.

Senator PELL. You mean in your regular consumer loans, the delinquency rate is only 1 percent?


Senator PELL. Is that not quite unique?

Mr. DAVIDSON. It might be. I think on the eastern seaboard, probably 2 percent overall. But you have to remember, a student coming out of school has to find a job, and it takes a while to get situated.

Senator PELL. But for the other 90 percent of your portfolio, the delinquency rate is 1 percent?

Mr. DAVIDSON. One percent. And I supplied those figures to the Federal Reserve Bank of New York.

Senator PELL. I think they are pretty impressive.

Mr. DAVIDSON. We do run a tight shop.

Senator PELL. Could you submit for the record what the national average is, delinquency-wise?

Mr. DAVIDSON. I would imagine somewhere between 22 and 3 percent.

Senator PELL. We have heard from some witnesses that the guaranteed student loans are among the most profitable investments a bank can make. There is nothing wrong with profit.

Is that true? How do you do in the student loan market? Is it a profit?

Mr. DAVIDSON. The answer to that is no, it is not one of the most profitable loans we can make.

Senator PELL. Why would it not be, when there is a zero delinquency rate?

Mr. DAVIDSON. There is administrative costs in keeping that zero rate in force. There is paper shuffling that eats up a good deal of administrative expenses of the bank. I can make a secondary mortgage loan at a rate of 17 percent, secured by real estate, and go to sleep at night, and not worry about it.

Senator PELL. Hopefully. Basically, you support the Williams' bill?

Mr. DAVIDSON. Right.

Senator PELL. But not the House bill?


Senator PELL. Or the Kennedy-Bellmon bill?

Mr. DAVIDSON. No. Not the administration bill, I beg your


Senator PELL. Not the administration bill?


Senator PELL. Right. All right.

Senator Stafford?

Senator STAFFORD. Mr. Chairman, I have no questions of the present witness.

I might say, my people in my State seem to agree with you, they prefer the status quo rather than some change.

Senator PELL. I am still very impressed with your very high rate of repayment. You virtually lack delinquency, both on the student loans and on the consumer loans.

Do you have an extra percentage of your staff engaged in followup? What is the reason for your success?

Mr. DAVIDSON. I think we police our loan activity well, Senator. Especially in today's money economy, you have to. We service a high per capita income area. We are in the northern part of New Jersey. That has a lot to do with it, too. We are not suffering any layoff in the job market in our particular sector of New Jersey. So that has quite a bit to do with it.

Senator PELL. You will give a loan to anybody. Are you saying a young man can walk in off the street, no employment, living apart from the family, black, and poor, and you would give him a loan? Mr. DAVIDSON. Student loan?

Senator PELL. Yes.


Senator PELL. That is good. That is not true in some parts of the country.

I thank you very much for being with us, for your testimony, and appreciate knowing your views. And if we need more information, we will be back in touch with you and your Association.

Mr. DAVIDSON. Thank you very much.

[The prepared statement of Mr. Davidson follows:]

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