from the table included below, a higher proportion of Federal aid would be in the form of grants/work-study than in any year since 1980. This increase in grant/work-study aid under our budget proposal is a result primarily of our request for increased funds for the Pell Grant program.

Mr. Early. What are your plans for dealing with the high default situation during fiscal year 1988 and fiscal year 1989?

Secretary Bennett. In fiscal year 1988 the Department will continue to pursue administrative measures designed to improve collections and reduce defaults. We will continue to use private collection agencies to complement Federal collectors, offset the salaries of Federal employees in default, offset the Federal tax refunds of defaulters, and improve lender and guarantee agency collection "due diligence" requirements. More recently the Department has emphasized to postsecondary institutions that they have a key role in reducing GSL defaults.

The Department is also seeking several legislative amendments which would become effective the last quarter of fiscal year 1988. We are proposing default risk-sharing with lenders and guarantee agencies by reducing lender insurance from 100 to 90 percent and limiting insurance of new guarantee agency loans to a maximum of 90 percent of default claims.

Mr. Early. Will the Department be eliminating any institutions from participating or suspend them from the program?

Secretary Bennett. In January 1991, the Department will begin termination proceedings for those institutions that cannot reduce their default rates by the end of fiscal year 1989. Since these institutions will be given the opportunity to show the existence of mitigating circumstances through the hearing and appeals process, it is estimated that no institution will be denied Federal student aid funds before the end of 1991.

MAGNET SCHOOLS

Mr. Early: You are proposing a significant change in the Magnet Schools program. Why are you proposing to make funds available to all school districts and not just the ones covered by desegregation plans as is now the case?

Secretary Bennett: Our proposal to extend eligibility for Magnet Schools Assistance to school districts not undergoing desegregation reflects our belief that magnet schools are important tools for upgrading the quality of education for all students, increasing parental choice and bringing together students from a variety of backgrounds. Many school districts not covered by desegregation plans particularly those with a large

number of disadvantaged students have determined that the magnet school approach is a successful school improvement technique and need Federal assistance to help them to initiate magnet school programs.

Mr. Early: Does the Department have data indicating that there is sufficient interest on behalf of the local school districts to open this program up to a wider population?

Secretary Bennett: Program staff indicate that

non-desegregating as well as desegregating school districts have expressed interest in the Magnet Schools Assistance program.

Mr. Early: What has the Department heard from the State and local schools on this matter?

Secretary Bennett:

The Magnet Schools approach has proved to be a successful school improvement technique. Many school districts not undergoing desegregation are implementing magnet school programs to increase parental choice and racial diversity and to enhance the quality and reputation of participating school systems.

After the President visited Suitland High School, a successful Prince George's County, Maryland magnet school, and announced our proposal to expand the Magnet Schools program, many school districts expressed interest in the program. Some districts requested program information either directly or through congressional contacts. In addition, many districts that had not previously applied for Magnet Schools Assistance have requested technical assistance in preparing applications for 1989. On the whole, local school districts have reacted positively to our proposal and we expect a large number of highly competitive applications for the 1989 grant competition.

FY 1989 PELL GRANT PROGRAM COSTS

Mr. Conte. Am I correct that if we turn down your proposed repeal of "ability to benefit" eligibility, we would have to add another $187 million to the proposal?

Secretary Bennett. Yes, that is correct. The Department estimates that the cost of the proposed Pell Grant program is $5.011 billion, which includes a savings of $187 million resulting from our proposal to require each student to possess a high school diploma or its equivalent in order to participate in the Federal student aid programs. Rejecting this proposal would add $187 million to program costs.

Mr. Conte. Are there any other items that would add to the cost of going to $2,300?

Secretary Bennett. The Department's estimate of $5.011 billion in fiscal year 1989 reflects the costs associated with the Administration's proposals to fully fund the current law Pell Grant program with a $2,300 maximum award, implementation of the proposal to eliminate non-liquid assets from the determination of need, and the proposal to require a high school diploma or its equivalent to participate in the student aid programs. Both the proposal to raise the maximum award to $2,300 and the proposal to eliminate non-liquid assets from the need analysis result in increased costs, $220 million and $266 million, respectively. Rejecting either of these two proposals would result in decreased program costs.

Mr. Conte. Is there enough of a chance that you have overestimated the cost this year too, that you could go ahead and issue a full payment schedule?

Secretary Bennett. Our Pell Grant cost estimates are based upon expectations of future economic and demographic circumstances applied to the known characteristics of our current applicant population. There is always the possibility that our assumptions will not be borne out, and that we are under-estimating or overestimating future program costs. Both situations have occurred in previous years.

We are reasonably confident that our current methodology and assumptions of future circumstances are providing as accurate a prediction of future program costs as possible. We believe it would not be fiscally responsible to pay full awards knowing that current funding appears to be insufficient. This is particularly

true in light of the first-time implementation in 1988 of the recent, but untested, provisions of the Higher Education Amendments of 1986. These amendments, in particular the new independent student definition and the institutional waiver authority, are expected to increase program costs significantly.

Mr. Conte. What if we gave you authority to borrow the $99 million from the 1989 appropriation so you could issue the full schedule? Would that work, and when would you have to know?

Secretary Bennett. We have borrowed heavily against future appropriations a number of times in recent years to fund the Pell Grant program and do not support this means of meeting our projected $99 million shortfall for 1988. When we borrow from future appropriations, later funding requests and appropriations must necessarily be inflated beyond program cost estimates to make up for otherwise available resources which were instead expended in a prior year. This always causes a great deal of confusion and uncertainty which we are anxious to avoid. We believe that a flat dollar reduction of all students' awards by an equal amount, currently estimated at $31 per recipient, without elimination of any awards, would be a far preferable means of meeting the anticipated shortfall.

Should the Congress instead direct us to borrow the shortfall amount from the 1989 appropriation we would need to issue a revised full-funded payment schedule to institutions as soon as possible, but certainly no later than July 1, 1988, when schools begin disbursing Pell Grants for the 1988-89 award year. The Congress would need to take action on this issue by April 30, 1988 in order for this to be possible.

CAMPUS-BASED STUDENT AID

Mr. Conte. Don't we get a bigger bang for our campus-based (SEOG, Work-Study, and Perkins Loans) dollars this year as a result of the institutional match increasing under the 1986 amendments?

Secretary Bennett. The 1986 amendments introduced a new matching requirement in the SEOG program which will be phased in through 1991, and mandated a gradual increase of the current WorkStudy matching requirement, particularly for private for-profit organizations, through 1990. These changes will certainly result in an increase in total aid available to students. It is for this reason, and also in order to reduce an unnecessary Federal subsidy to non-profit employers which benefit from the services of student employees, that we are proposing that the Work-Study matching requirement for non-profit employers be increased to 30 percent in FY 1989, 40 percent in FY 1990, and 50 percent in FY 1991 and thereafter.

GRANT-BASED STUDENT AID

Mr. Conte. I am particularly interested in the SEOG program where we already have a maximum award of $4,000, a new institutional matching requirement of 5 percent this year growing to 15 percent in two years, and a need for three to four times the amount we have

been able to appropriate.

Your budget proposes a $4 million increase over fiscal year 1987, but do you agree with me that we could go a long way toward redressing the grant/loan imbalance if we provide a larger increase here?

Secretary Bennett. Our $416.6 million FY 1989 request for the SEOG program represents an $8.2 million increase over the FY 1988 appropriation. Also, the new matching requirement will further increase the number and amount of grants to students. In addition, we are requesting $5.011 billion for the Pell Grant program, (a $751 million increase over the FY 1988 appropriation) and also proposing that the maximum Pell Grant award be increased in 1989 to $2,300. We feel that, taken together, these requests ensure that a reasonable proportion of the Federal student assistance will be in the form of grant aid.

COLLEGE SAVINGS PROPOSALS

Mr. Conte. Do you have any reason to believe that the Ways and Means Committee will act on any savings proposals this Congress?

Secretary Bennett.

Several bills to provide tax incentives for family savings for postsecondary education have been introduced in the House during this Congress, including a bill sponsored by Congressman Rangel who is a member of the Ways and Means Committee. The Department has not been informed about the Ways and Means Committee's plans for action on this subject. Certainly, this is an important subject and one which is of considerable interest to families across the Nation.

As you know, a College Savings Bond proposal has been included in the President's 1989 budget. A Federal College Savings Bond program to encourage family saving for postsecondary education would not only call attention to the need for saving, but would also provide a tax incentive and a convenient, nationally available mechanism for them to do so. Under our proposal, the interest accruing on College Savings Bonds would not be taxed if the bond is used to meet postsecondary education expenses. Our College Savings Bond bill will be submitted very shortly to the Speaker of the House and the pertinent House committees. Its enactment is a high priority on our legislative agenda.

STUDENT LOAN DEFAULT INITIATIVE

INSTITUTIONAL ACCOUNTABILITY

Mr. Conte. Mr. Secretary, you recently made a splash in the press about Guaranteed Student Loan defaulters and your intention to drop institutions from eligibility if their former students have default rates of 20 percent or more. Doesn't that just penalize the wrong party? Since the loans are made by lending institutions, not the schools, why not penalize the lenders with high default rates among their borrowers?