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Sallie Mae believes that it has the responsibility to

purchase portfolios of loans from lenders whose origination practices are satisfactory, even though these institutions have shown relatively high incidences of default. As such, Sallie Mae's portfolio contains an above-average number of loans made by open access lending institutions who provide credit to disadvantaged and minority borrowers. In some instances, the default rates of these institutions have been above 30 percent. Many institutions have indicated that they would not support the GSLP without Sallie Mae standing by as a secondary market outlet for the loans they originate,

It has been suggested that Sallie Mae has no risks in its operation. The assumption is that Sallie Mae purchases government insured assets and finances with government guarantee of its debt, thereby assuring a profit. Even if the above statement were correct, there would continue to be substantial financial risks to the corporation. However, the statement is incorrect because the government guarantee of the assets does not protect against fraud or certain legitimate defenses against payment by a student.

The earnings risk to the corporation comes from regulatory, operating and financial risk. The amount of income generated by a student loan is very small in real dollars and declines quickly as the loan repays. Out of those small amount of dollars must be paid all of the ongoing costs for interest on borrowed funds, general overhead and collection and servicing costs. The corporation's practices are regulated not only by the Office of Education and the state guarantee agencies, but also by the general policies adopted by bank regulatory agencies (i.e., truth-in-lending) and the Federal Trade Commission. A modest regulatory change such as increasing the frequency of contact with a student or a change in telephone or postage rates can have a tremendous impact on earnings. Additionally, when Sallie Mae purchases a student loan it may be collecting from the student, using an outside agent, for perhaps as many as fifteen years. Servicing is labor intensive and costs are tied to inflation, thereby inhibiting servicing agents from writing long-term contracts.


S.1841 would substantially enhance existing programs. you have heard from other witnesses, the 1976 and 1978 amendments to the Higher Education Act, the increased diligence by regulators and lenders, and the enhanced role of state guarantee agencies have resulted in program growth of nearly 40 percent in 1979 versus 1978 at a time when defaults have been substantially decreased. The proposed amendments would build on this exciting positive trend. The changes pertinent to Sallie Mae would broadly strengthen its ability to acquire private capital and expand its programs in support of the GSLP. With the approval of appropriate state and Federal authorities, Sallie Mae would be able to initiate a lender-of-last-resort program as a primary lender in a part of the country where there was an acknowledged capital shortage. Additionally, through expansion of the Warehousing Advance Program, Sallie Mae would be empowered to

lend to institutions who had not previously participated in the GSLP. Sallie Mae would also be able to offer individual students opportunities to consolidate debt burdens into a single note with extended repayment terms available that recognize the ability of the student to repay. The changes in the proposed legislation should increase the availability of credit to qualifying students, providing access to the institution of choice. The Federal bureaucracy would not be increased in size or cost.

Sallie Mae stands ready to assist the Committee and its staff in any way possible as they proceed with their examination of the programs and the drafting of legislation.

Senator PELL. Senator Williams is here with us, and we will now put on the panel that was going to discuss his bill, which was originally scheduled first, but we wanted to wait for Senator Williams. And the panel for Senator Williams' proposal consists of Mr. William Nester, director, Student Financial Assistance, New Jersey Higher Education Loan Authority, Trenton, N.J.; Ms. Carol Wennerdahl, director, State Student Loan Programs, Illinois Guaranteed Loan Program, Deerfield, Ill.; Mr. Donald Betterton, director, Student Aid Office, Princeton University, Princeton, N.J.; Mr. Joel Packer, legislative director, United States Student Association, Washington, D.C.; Mr. Dallas Martin, executive director, National Association of Student Financial Aid Administrators, Washington, D.C.



Senator WILLIAMS. I would like to make a short statement. And I appreciate, Mr. Chairman, that you recognized the time problem I had. I hope it did not create a problem for any of the panel. Mr. Chairman, earlier this week I introduced S. 1870, the guaranteed Student Loan Improvement Act of 1979. This bill was formulated after a thorough review of the crucial issues underlying higher education's future in the years ahead. These issues include the prospect that enrollment of full-time students of traditional college age could decline from 15 to 30 percent between 1980 and 1990 and that the cost of college education could more than double in the same period.

After assessing the financial obstacles to higher education faced by colleges and students and their families, I have concluded that the provisions of S. 1870 could lead to a stable, realistic and affordable loan policy in the years ahead. This proposal not only would provide realistic loans to full-time students and their families, but would promote higher education for less than half-time students by extending both the GSL and NDSL program to degree-pursuing students who enroll for two to six credits per semester or quarter. In this way, Mr. Chairman, we take one small but important step to assure college access for the so-called new markets of higher education. These groups include women who must prepare for workplace reentry as a result of pressures exerted by rampant inflation; older adults, many of whom are engaged in occupational shifts and improvement; workers and managers who look to higher education for improved quality of life and work; and immigrants

from other lands who strive to participate in the mainstream of life in their new Nation.

In the days ahead, this subcommittee and the full committee will analyze and debate student financial assistance and the several proposals offered to solve them. I look forward to participating in this process.

As we begin consideration of the Federal student loan program, Mr. Chairman, let me say that we have created loan policy which after many reauthorization cycles is viewed as stable and effective by many experts.

My proposal builds upon the present structure. It is predicated upon a commitment to do everything in our power to preserve and maintain our hard-won system of higher education, a system facing immense financial uncertainty in the coming decade. It is in our national interest to preserve that system not only through enhanced student access but through improved quality of instruction, research and community service as well.

Mr. Chairman, I appreciate your continuing guidance to our Federal effort to enhance both quality and access in higher education and I look forward to hearing from today's witnesses on the role and outlook for federally supported loan programs.

Thank you.

Senator PELL. Thank you very much, indeed, Senator Williams. I do not know how you would like to proceed.

Doctor Martin, Welcome. You are an old friend of this Committee.


Mr. MARTIN. Thank you, Mr. Chairman, Senator Stafford, Senator Williams.

As you know, the student loan programs have been the subject of much debate in the past several months and, unfortunately, many of the facts and significant features of the programs have been distorted, misreported, and taken out of context. Consequently, those persons who are not familiar with the detailed operations of these loan programs are often led to believe the existing programs, specifically the NDSL and GSL, are not working and should, therefore, be substantially modified or replaced by new approaches and mechanisms.

Let me, for just a moment, today review briefly the current national defense student loan program and some of the problems that face that program, some of the causes of those problems. Lack of adequate capital to meet the needs of all students. First, annual appropriations have consistently been less than the

amounts requested by participating institutions. In fact, this last year they were only able to meet 61 percent of the total.

Second, existing cancellation features tend to dilute the primary fund.

Third, poor collection practices at some institutions have reduced the pool of dollars available for relending.

Fourth, inappropriate distribution mechanisms have been used in allocating funds to States and institutions.

Fifth, the Office of Education's inefficiency in providing program regulations, administrative support and technical assistance.

Sixth, annual uncertainty about the future viability of the program which has caused many parties to delay implementation of operational procedures that can make the program work.

We also find that the second problem facing this particular student loan program is increased concern about rising default rates. Again, the causes are clear.

First, lack of administrative guidelines, training and administrative management from the Office of Education.

Second, poor management, counseling and collection activity at some institutions.

Third, lack of an efficient backup collection network.

Fourth, a change in the method of calculating defaults which fails to recognize outstanding loans that come back in repayment. Fifth, inflexible loan repayments.

Sixth, lack of procedures to handle loan consolidation.

In addition, however, we should also look at the program's strengths:

One, loans are originated at the campus by the financial aid administrator in coordination with other kinds of financial aid;

Two, the program has a broad political base of public support because of the number of people who have been served over the years;

Three, operational systems for administering the program are in place and well understood at the majority of campuses which desire to participate in the program;

Four, the program provides a ready source of loan capital to the neediest students at a reasonable rate of interest without subjecting students to lender restrictions;

Five, the program is based upon financial need, as determined by the institution, thus insuring that the neediest students receive first priority for these loan funds.

Having now looked at the problems and advantages of the NDSL Program, it is appropriate that we review the changes that need to be made to insure that it operates more efficiently.

First, we must recognize that changes which are currently being implemented by the Office of Education and Institutions of Postsecondary Education will go a long way to reduce the problems I previously discussed. For example, for the first time since 1972, the Office of Education has finally completed program regulations for all phases of the student loan program operations.

Also, for the first time since 1976, the Office of Education has reinitiated IRS skip-tracing provisions which will aid institutions in locating lost borrowers. Further, the Office of Education has finally initiated the provisions contained in the Higher Education Act of

1972 to permit institutions to assign defaulted loan notes to the Commissioner for collection. We are also finding that, due to the penalties now being levied upon institutions with high default rates, more institutions are taking the additional steps and allocating needed resources to properly administer their student loan collections.

With these positive actions just beginning, I am certain that reduction in defaults and increased availability of loan capital will occur even without legislative changes to the program. However, there are additional steps that can be taken to further improve these areas.

We realize that some additional capital can be generated for the program by raising the interest rate from 3 to 7 percent. However, I think it is appropriate that the members of the subcommittee realize this approach requires the borrower to assume a greater burden.

For example, if a student borrows $5,000 under the existing NDSL program, and is forced to pay 7 percent interest rate rather than the 3 percent currently required, the total interest paid by the student during the normal life of a loan would increase from $768.80 to $1,712.81, or an increase of $944.01. While I realize the student may be repaying this amount with deflated dollars, and as a result of obtaining his education, should be in a higher earning bracket, for many students such is not the case.

Many of my colleagues deal with large numbers of students who withdraw from the college education without completing their degree program and are, in fact, still required to repay their educational debts. While I agree with the testimony given yesterday by Mr. Mundel of the Congressional Budget Office, that there is little evidence to suggest that, "Providing loans bearing interest below market rates is unlikely to affect either whether a student goes to college or which institution he attends," we also must not lose sight of the fact that studies on retention show that loans tend to discourage student persistence. Therefore, we must carefully preserve the balanced approach to postsecondary financing which insures adequate dollars for grant, work and loan programs.

Our members are also concerned about loan program consolidation. We strongly favor the phaseout of seven Federal loan programs, and would prefer the establishment of two programs, an NDSL or need based loan program and a GSL or liquidity loan program. We would strongly caution the Members of Congress to remember, however, that if such an approach is to be undertaken it is essential that we do not reduce the resources which are currently available to deserving students under these other categorical manpower-type loan programs. In addition, it is essential that the phasing out of one program and the phasing in of another be carefully coordinated to insure that we do not disrupt the needed funding for students who are currently benefiting from these other loan sources.

I know of many hospital schools of nursing, for example, who currently only participate in the nursing student loan program. Therefore, they would need adequate leadtime to apply for and obtain their eligibility for another need-based program.

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