Still another improvement that needs to be made in this reauthorization is a simple and straightforward manner of handling consolidation of student loan debts. Statistics show that students who withdraw from school before completing their educations and students who have borrowed from more than one loan source are more likely to default than other students. Therefore a mechanism for loan consolidation, such as the ones found in H.R. 5192 and S. 1870 is a very desirable objective.

We also feel that this committee should review very carefully the whole area of loan collection. While many have criticized the current procedures and practices, the truth is that this whole area requires a thorough knowledge and understanding of current practices by institutions, banks, private collection services, and the Federal Government to understand the most logical approaches. The administration would suggest that all collections be handled by a Government student loan association which might include State agencies, schools, and private firms. Likewise, S. 1600 would also develop a similar scheme in which case a student loan marketing association would have the primary responsibility. Our concern with either approach is that each relies too heavily on a centralized collection network which may be unmanageable. The Office of Education's own statistics will show that most institutions which do their own collections have a lower default rate than those institutions which rely totally on outside servicing.

While it is true that some of these institutions which are utilizing outside servicing may have additional circumstances which have caused them to seek such help, commercial agencies will quickly attest to the fact that accounts from an institution which follow proper preloan counseling and exit interview procedures are far easier to collect. Ironically, cumulative statistics will also show that the Federal Government, in the majority of cases, is by current practices the least effective agent in performing collections. The Comptroller General's report, which was recently released, concerning the Federal Government's ability to collect all types of debts stated that because of legal and institutional constraints placed on Federal collectors and extensive documentation requirements, they cannot meet the cost effectiveness record of private industry. The report further recommended that all Federal agencies adopt some of the collection practices of commercial agencies to streamline their operations.

While OE's recent track record is better than some other Government agencies, a detailed study of the true cost of their operation would clearly show that in open competition they would probably go bankrupt.

Auditable statistics from most commercial collection firms would show that a trained professional agent with a fixed number of accounts will average about $15,000 in gross collections per month. Statistics from OE's own in-house newsletter entitled "The Collection News," will show that their best collectors are only able to collect about a third as much under comparable circumstances. Perhaps it is this very knowledge which has led OE to contract with outside private collection agencies to assist them in handling loan collections in two of their most troublesome regions.

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In addition, many of the accounts being handled are not the real hard core collection cases. Rather, they are accounts which have been sitting at OE for the past 3 to 4 years because they were turned over to OE by banks under the federally insured student loan program before adequate due diligence and collection procedures were implemented. In some cases students simply did not receive a bill from the Federal Government for years. I would suggest that many people would probably ignore their debts to other companies or businesses as well if they did not receive regular monthly statements, reminders and a legitimate possibility of losing all future credit from these creditors. OE, on the other hand, has just now learned that such action is necessary if you expect to collect any kind of debt.

The administration and the Kennedy-Bellmon loan programs would also purport to increase capital through direct borrowing from the Federal financing bank for their basic need-based loan programs. While such an approach may be possible, we are unclear as to how this will guarantee additional needed capital. Direct appropriations, the mechanism which is currently used for NDSL, as well as borrowing authority from the Federal financing bank, are both subject to congressional approval and in fact cost the American taxpayer the same amount. While one appears as a direct on-budget line item and the other may be viewed as offbudget, both mechanisms equally raise concerns about program costs in Federal outlay.

Both the Kennedy-Bellmon proposal and the administration's approach would require 90-percent collections from previous NDSL's to be added to the pool of total loan dollars. While such an approach may be reasonable, it may penalize a given institution by reducing its loan capital when, in fact, that institution has properly performed its loan collection responsibilities for several years. The administration and the Kennedy-Bellmon loan proposals would both allow interest to accrue for graduate students during their inschool periods which would later be added to their loan principal. H.R. 5192 and S. 1870 would, on the other hand, forgive interest during a graduate student's inschool grace and deferment periods. While this feature may seem to be fairly inconsequential, it is important for us to remember that this country needs to support graduate education for needy students as well as for the more well-to-do. Failure to defer inschool interest only adds to the student's total indebtedness which, in turn, may influence a student's career decision of his or her degree objective.

I could go on with many other concerns, Mr. Chairman; however, in the interest of time and the fact that this is a very complex issue, I would like, with your permission, to provide some other specific suggestions and comments for the record on each of the loan proposals, including the supplemental parent loan programs, which have been submitted for your consideration. It is our hope that such detail would indeed be of help to you and your staff in developing the best loan alternatives for this reauthorization.

Thank you, Mr. Chairman, for the opportunity to appear before you today. We sincerely appreciated your and the distinguished members of this subcommittee's interest in this area, and we pledge our support to assist you in resolving this matter.

Ms. WENNERDAHL. Thank you, Mr. Chairman, Senator Stafford and Senator Williams.

As you have heard in the last couple of days, the issues are varied and complex. Rather than trying to do justice to many issues, I would like to focus my comments on what I think is probably the most critical issue you will have to address in the guaranteed student loan program. This issue is the cost of student subsidies, which includes the 7 percent interest rate and a special allowance. Considerable emphasis will be given to this subject in the upcoming reauthorization process. I think the concerns which have been expressed are genuine and valid.

However, to put them in perspective, I would like to point out that this particular issue is not new. In 1972 these same concerns caused the Congress to pass legislation which provided the interest subsidy only to students who met financial need criteria. There was not one argument heard in yesterday's hearing, not one threat concerning the potential loss of funding for other student aid programs that we did not hear in 1972. Those arguments were persuasive then, as now.

However, there was one fatal oversight in that legislation. The lenders refused to make most of these nonsubsidized loans, and the Congress was forced, within 6 weeks, to pass legislation rolling back the effective date of that provision so students could obtain loans to go to school that fall.

After many years, and many changes to the program, we now have a program that has the two necessary elements to maximize the commercial lender participation. First, it is administratively streamlined to minimize lenders' administrative costs. And second, it has a yield which they consider dependable and fair.

If the Congress should pass any legislation which increases the lenders' administrative costs, without simultaneously increasing the lenders' yield to cover those costs, the lenders' participation will diminish in direct proportion to the increase in costs and added complexity.

In 1972, the lenders rejected the nonsubsidized loans because the cost of processing individual interest payments from each borrower four times a year was considerably more expensive than generating one total balance on which the Commissioner of Education issued a single check.

The lenders only other alternative was forgoing the collection of any interest income during the borrower's inschool period, and they found that equally distasteful. The Kennedy-Bellmon proposal and the administration's proposal not only burden lenders with the hated 1972 problems, they add additional complexities. Both bills return the program to a multirate structure just when all of the old multirate loans are close to being fully repaid. The KennedyBellmon proposal would have a special allowance rate which could be unique to each student, especially where loans of varying base interest rates are combined into a single repayment instrument. Lenders would have to keep separate balances on each category of special allowance formulas in order to be paid. Right now, they merely have to compute a single balance.

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The administration bill, on the other hand, circumvents that problem, but creates another. That proposal would have a constant special allowance rate for all borrowers to be paid on top of a base interest rate which is fixed at the time the loan is made. Lenders during periods which the yield was unfavorable. Advocates of the have warned me that this could result in very low loan availability administration's proposal have pointed out that the mortgage market is operated in this manner, but I am not convinced.

First of all, people seeking mortgages do not expect to borrow every year, and if they tried, I would predict that quite a few would not get another mortgage because of a different market climate. Second, the giants in the mortgage business are the savings and loan associations. The vast amount of the student loan program's volume comes from banks, who seem less enthusiastic than the savings and loan associations about the mortgage business.

Some advocates of the Kennedy-Bellmon proposal and the administration's proposal are willing to concede that lenders would make fewer loans available under either proposal, but they hasten to availability of need-based loans under their proposals. I have two point out that fewer loans are needed because of the expanded

observations to make.

First of all, it was the rejected applicants who did not meet the needs criteria in 1972 who caused the near riot. They are still out there. Second, there is a vast difference between reducing the number of loans by reducing demand as opposed to reducing

supply.

It is possible to construct a guaranteed loan program where the base interest is not subsidized, but which will be attractive to lenders while bearing the same interest rate as the current guaranteed student loan program. In my opinion, the parent loan program

contained in S. 1870 meets that criteria.

The authors of this parent loan program faced a difficult challenge, both technically and politically. They sought a way to increase loan funds available to families who are financing an educathe debt burden on students. They found a way. They also had to tion at higher priced schools, but without increasing significantly find a way to keep faith with the agreements they made with colleagues in the Congress when they offered certain levels of middle-income family subsidies as an alternative to the considerably more expensive tuition tax credit proposals. They found a way

to keep that faith.

Lastly, I want to associate myself with Mr. Fox's remarks about program costs. If you want to save taxpayers' money, you can do it by decreasing the number of loans, but it should not be done by letting the lenders arbitrarily pick and choose, thus exacerbating the problem that you have now. You can take away the subsidies you have given middle-income families in this program. But if you are considering an alternative which you think will save costs administratively, such as has been claimed by the proponents of a national student loan bank, the numbers just do not work. If they say they can do it more cheaply, I would make them prove it to

you.

I thank you again for this valuable opportunity. I would be happy to answer my questions at the appropriate time.

Senator PELL. Thank you very much.

Mr. Packer?

Mr. PACKER. Thank you, Senator.

Senator Pell, and members of the subcommittee, I would like to thank you for the opportunity to be here today. My name is Joel Packer, and I am legislative director of the United States Student Association (USSA), which is the oldest and largest national organization representing college students.

You have before you several bills which propose revisions in the current loan programs: S. 1600, sponsored by Senators Kennedy and Bellmon; the administration proposal which you sponsored by request, S. 1841; and Senator Williams' modified version of the House bill, S. 1870.

These proposal fall into two categories, those which build on the strengths of the current programs of guaranteed student loans (GSL) and national direct student loans (NDSL) by making incremental improvements, and those which sweep away these programs and establish a new set of loan programs. The Williams' bill and the House bill fit the first category, while S. 1600 and the administration plan fit the second.

USSA strongly opposes both S. 1600 and the administration plan, while favoring the approach contained in the Williams' and House bills. While none of these proposals is perfect and all of them contain several attractive provisions, it seems clear that the problems inherent in the current programs can be met by the changes contained in S. 1870 and H.R. 5192.

We oppose the other plans because they would result in significant shifts in cost from the Federal Government to the student; likely create upward pressures on tuition; probably result in no major cost savings to the Government; not totally guarantee availability of loans to needy students; and prove disruptive to the continued flow of loan dollars to students.

Before turning to specifics, let me review briefly the history of the GSL program. GSL was established in 1965 and stemmed from the intense desire of the administration to derail tuition tax credits. The Treasury Department came up with the idea of loans for middle-income families. Initially, loans were provided at 6-percent interest, with an inschool interest subsidy for those students whose families had adjusted gross income of less than $15,000.

Public Law 90-460 raised the interest from 6 to 7 percent and created reinsurance authority for State guaranty agencies. Public Law 91-95, the Emergency Insured Student Loan Act of 1969, created the special allowance of up to 3 percent. Public Law 92318, the Education Amendments of 1972, increased the loan maximums, insured interest as well as principal, created the Student Loan Marketing Association (SLMA), and instituted a needs test for the inschool interest subsidy.

Public Law 92-391, a joint Congressional resolution in 1972, suspended implementation of the needs test until after March 1, 1974. Public Law 93-269, the Education Amendments of 1974, eliminated the needs test for those students from families with adjusted incomes under $15,000, in effect, the status of things before the 1972 Amendments. Public Law 94-482, the Education Amendments of 1976, made substantial changes such as raising the income ceiling