To recapitulate my understanding, as I understood your testimony, basically you would prefer the existing law to any substantial changes in it, am I correct?

Mr. Fox. We are very supportive of the amendments to the existing program.

Senator STAFFORD. Which amendments?

Mr. Fox. The House bill, and Mr. Williams' bill.

Senator STAFFORD. Thank you. I wanted to clear that up.

As I understand your testimony, Mr. Fox, the Sallie Mae has never had any appropriated funds?

Mr. Fox. That is correct, sir.

Senator STAFFORD. And some profits have been made. But I noticed that the guaranteed student loan program has a default rate of 10.2 percent. Is that an accurate figure?

Mr. Fox. I would be surprised if any figure is accurate. There is a lack of a good data base, but that figure seems to be right. Senator STAFFORD. Does that mean you suffer a 2-percent loss on outstanding loans, which I think are $1.24 billion at the present time?

Mr. Fox. About 12 percent.

Senator STAFFORD. So that your losses on a $1.24 billion outstanding total would run somewhere around $140 million?

Mr. Fox. Over the life of the portfolio, yes.

Senator STAFFORD. I gather you have been able to make up the loss of 10- to 12-percent loss rate from profits made in those loans that are repaid?

Mr. Fox. The loans we buy are guaranteed, either by the Federal Government or by 40-some-odd State guarantee agencies, or private institutions. And to the extent that we have been diligent in our handling of those loans, the loans should be repaid in full by the guaranteeing agency, and become part of the Federal or State loss. Senator STAFFORD. Then that means, in reality, for example, this year if you suffered a $144 million loss, that if the Federal Government is the guarantor, then the taxpayers actually are subsidizing these loans to the extent of loss they pay to you on the guaranteed student loans in default?

Mr. Fox. That is correct. We are an intermediary. We are taking loans created by the institutions, at the Federal Government's risk. We are taking them off their hands. However, the assumption that any time a student defaults, the payment will be automatically made by the Federal Government is not correct.

We cannot set up reserves. We know some portion of the loans we own eventually will not be paid back by the students or guarantor. We are new in the repayment business, and the loans we have been buying in this short period of operation have been those loans of students going to school.

The defaults we have actually experienced are quite small-$7, $8 or $9 million, or something like that. But over time we expect, as more and more loans go to repayment, a significant portion will not get paid back. It is our hope we can reduce those defaults. I should also point out, institutions who expect more defaults tend to be those who want to sell them to us. Inner city institutions frequently come to Sallie Mae. Your community bank in Vermont, who perhaps knows everybody in town, is not as inclined to sell to

Sallie Mae as, say, a big bank in Philadelphia. They are delighted to allow us to have the opportunity to do the collection effort. Senator STAFFORD. Thank you very much.

Thank you, Mr. Chairman.

Senator PELL. I think to try to digest the situation we find ourselves in, and which direction we go, I have found the figures that of the Congressional Budget Office, Mr. David Mundel gave us yesterday are helpful. What it boils down to is a choice in a 5-year period of saving a great deal of money each year, and that is the Kennedy-Bellmon approach. But it would mean the cost of the program being shifted to the students, through raising the interest rate, and a special allowance to the banks would be knocked out. For these reasons, obviously, student groups, and I would think the banks, would prefer the present law, or the Williams bill, or the House bill. I have not seen a witness yet who testified for a proposal that went against his interests. By the same token, we have to make a choice as to whether the savings to the taxpayer out balances the additional burden to the student.

As a general rule, my hunch is that we do not want to see any additional burden to the student. This is the simplest approach. Would you agree?

Mr. Fox. In the first place, I do not believe the 32-percent special interest allowance is a gift. I think that is a bona fide payment for expenses. And I say that having chaired the Special İnterest Allowance Committee for the Congress a year or so ago, who examined this, and used auditors to go into banking institutions, I do not believe we have had indepth figures, but the administrative costs, and the burden of this program are not going to go

away.

Whether you pay it in special interest allowances, or to some entity, those costs will be there. I do not think they were adequately reflected in yesterday's presentations. The only savings I saw that accrued in the Kennedy-Bellmon bill, over the existing legislation, was the fact that certain levels of subsidies to students were being changed. I do not believe that administrative costs will be less in this program than they are with the banking system doing it.

Senator PELL. I would partially agree with you, that the administrative costs are small amounts. But the basic saving of the Kennedy-Bellmon bill is because they shift more of the costs to students. It is about that simple.

In all cases there still is a Government subsidy. Interest on student loans will be less than the going commercial rate. So we have to make up our minds as to whether the burden should be increased to the student. So far, we have decided against it.

Mr. Fox. My point would be that the moneys going out now are not creating an egregious profit for anybody out there, but support the services. And the costs will be there regardless of who does it. This is a labor-intensive process. You do it on the telephone, you do it in person. Those will not go away.

To ignore administrative costs one way or another is absurd. I believe you can direct subsidy money in existing programs equitably, and without major changes in the existing programs, as opposed to making a substantive change.

Senator PELL. We both agree that the substantial difference in cost is the result of the difference in the interest rate.

Mr. Fox. The subsidy to the student, yes.

Senator PELL. That is why the current program, in a 5-year period, would cost $10.5 billion. The House version, $10.5. Senator Williams' bill, $10.6, and Kennedy-Bellmon, $5.2. And 15 percent costs even less. That overly simplifies where we are.

Mr. Fox. There is a tendency to determine costs based on current interest levels, which as you pointed out are extraordinarily high. If the Government had to subsidize it at a 15 percent rate for the next 5 years, it would be an outrageous program. You can direct subsidies in other programs without the change of delivery mechanism. Access does not seem to be a problem any longer.

Senator PELL. As in many other countries, tuition and those costs are absorbed by the State, and the student has no charges to pay, provided he can keep up with the standards.

Mr. Fox. Subsidies of those countries show tax dollars of lowincome people are paying for higher income people.

Senator PELL. Thank you very much, indeed, Mr. Dunlop, Mr. Fox.

Mr. DUNLOP. Thank you, Senator.

[The prepared statement of Mr. Fox follows:]

TESTIMONY OF EDWARD A. Fox, PRESIDENT AND CHIEF EXECUTIVE OFFICER, STUDENT LOAN MARKETING ASSOCIATION

I am Edward Fox, President and Chief Executive Officer of the Student Loan Marketing Association, and I am pleased to be returning to testify before your Committee. I heartily endorse Dr. Dunlap's statements, particularly those comments pertinent to the existing Guaranteed Student Loan Program and the changes implicit in S.1841.

The Committee has heard representatives of the Administration, past and present, give testimony concerning the progress of Sallie Mae and their views of the future role for the corporation. We do not believe that the Administration has recognized the role that Sallie Mae has played in providing secondary market support for the Guaranteed Student Loan Program or understands how Sallie Mae operates as a financial institution under the authorities granted to it by the Congress.

In more than five years of operation, Sallie Mae has worked with nearly 600 lenders in 43 states and expects to increase that number by an additional 300 during 1980. These institutions include commercial banks, savings institutions, credit unions, educational institutions, state agencies and state secondary markets. Statewide programs are financed with assistance from Sallie Mae for the states of Michigan, Minnesota, Florida, Kentucky, South Carolina, Kansas, Indiana, and the District of Columbia. It is estimated that Sallie Mae program users represent about 50 percent of current total lending under the GSLP.

Sallie Mae has routinely and consistently done business with large and small institutions. The corporation does not require a minimum transaction size. Transactions have ranged in size from a purchase of a single student loan note for $600 to an approximately $50 million purchase from the State of Florida. The median purchase is below $300,000 which represents the sale of about 100 student accounts.

Since inception, Sallie Mae has provided nearly $2 billion of support to lenders under the Guaranteed Student Loan Program through its Warehousing, Purchase, and Commitment programs. As of September 30, 1979, Sallie Mae's current investment of $1.24 billion in the GSLP was equal to approximately 16 percent of all student loans outstanding.

Sallie Mae has never received any appropriated funds from the Federal government. Congress gave Sallie Mae the authority to borrow with the full faith and credit of the United States supporting its debt through 1982 which has enabled the corporation to borrow and without which the company could not have borrowed as a new institution. There is no evidence that suggests that Sallie Mae has increased the cost of operation of the Guaranteed Student Loan Program.

Sallie Mae has created servicing and collection standards which have improved the efforts of its own collectors and its many clients. Additionally, Sallie Mae has made numerous lenders more aware of their responsibilities in counseling students and setting underwriting standards. This has undoubtedly contributed to the improvement in default rates during the past few years reducing Federal program expenditures.

Sallie Mae raised $25 million in the private equity market in 1974. As of September 30, 1979, total stockholder equity including retained earnings was $41 million. In addition to raising equity capital, Sallie Mae in 1973 and 1974 raised $400 million in the private debt markets as a new untested corporation. There is no

doubt as to the ability of Sallie Mae to raise funds in the private markets after six years of successful operation.

The

Since the establishment of the Federal Financing Bank (FFB) in 1974, Sallie Mae has borrowed exclusively from this source. Total borrowings as of September 30, 1979, were $1.265 billion. FFB lends to Sallie Mae at a rate higher than it pays for its funds, generating a profit for the FFB.

Congressional intent behind the Federal Financing Bank was that those agencies utilizing the full faith and credit of the United States use the FFB in the interest of a more coordinated and cost efficient approach to financing. In fact, it has been the Treasury Department's position that Sallie Mae is required to use the Bank. Additionally, prior to the Congressional creation of the FFB, the Secretary of D/HEW testified in favor of the FFB and the requirement of Sallie Mae to finance its operations through the Bank.

In the five years since Sallie Mae marketed its equity issue, pre-tax earnings have been approximately $30 million, of which $15 million was retained by the company and invested in student loans, $14 million was returned to the Federal government in the form of income taxes, and $1 million was paid to stockholders in the form of dividends. The rate of return to the corporation for the five years ending June 30, 1979, on a compound basis was 9.3 percent, about as much as a risk free investment in a United States government bond would have earned over that period. Dividend yield to stockholders has been slightly less than one percent.

Sallie Mae differentiates between high risk lenders and high risk students. Sallie Mae does not purchase loans unless they have been originated and maintained in compliance with appropriate statutory and regulatory requirements. The corporation works with those institutions that are not in complaince to improve their understanding of these program requirements and has then been generally able to complete a transaction.