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Anounts do not reflect credic reform.

Purpose and Method of Operacions

Interese Subsidies. SLS loans are made co undergraduate students and to graduace and professional students. PLL'S loans are made to parents of dependene students. Otherwise, che loan cerms are che same. Boch SLS and PLL'S limits are $4,000 annual and $20,000 cumulative. There is no need analysis requiremens, although borrowing cannot exceed cos: of actendance minus ocher aid. For any award year (July 1 - June 30) che interest race is che lesser of the average 52-week Treasury bill race for the 12 months preceding June 1 of che prior award year plus 3.25 percent or 12 percene. The Federal Government does not pay che in-school/grace/deferment interess. Repayment of loan principal begins within sixey days of disbursement unless che borrower is eligible for deferment. No originacion fee is assessed.

The purpose of Federal interest subsidization of PLI'S/SLS loans is to promote che availability of relatively low-interese postsecondary education loans to students and their parents from commercial banks and other lenders. Although PLUS/SLS borrowers are less subsidized chan regular GSL borrowers, che current interest rate applicable to PLUS/SLS loans (based on che preceding year's 52-week Treasury bill race plus 3.25 percenc) is still lower than market interest rates on comparable loans.

o Special allowance This supplemental interese payment to lenders varies

wich 52-day Treasury bill rates. Quarterly payments to lenders (based on outstanding loan volume) assure that, when added to the borrower's Interest, the lender receives a total variable yield equal to che quarterly average of 52-week Treasury bill races plus 3.65 percent (18

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the Treasury bill race plus 3.25 percent exceeds 12.5 percent for any 12-monch perlod), or to the borrower's interest race, whichever is greater. Because Treasury bill rates are expected to remain below 9.25 percent in 1987-92, no special allowance paymenos to lenders are projected under current law.

Insurance costs. This accivicy promoces the availability of PLUS/SLS loans for postsecondary education by providing Federal reinsurance to participating Stace and private nonprofit guarantee agencies for up to 100 percent of their losses in insuring commercial banks and other lenders against borrower default on PLI'S/SLS loans. Based on annual default claim experience, an agency's reinsurance race can drop co 90 or 80 percent. The Departdent of Education also reimburses guarantee agencies for 100 percent of their losses due to borrower deach, disability and bankrupccy.

The guarantee agencies promoce lender participacion and provide various services to lenders. They must also require collection diligence on che part of lenders as a condicion of paying default claims. Once a claim has been paid co a lender, che guarantee agencies collect on defaulced accounts. They recurn co che Secretary about 65 percenc of their colleccions, depending upon the level of Federal reinsurance and che percentage recained co meet adminiserative expenses (by stacuce, 3n or 35 percent of collections may be recained for this purpose).

Beginning in 1989 guarancee agencies will be required under current authoriey co turn over to the Deparmens some or all of the defaulced accounts on which their collection efforts have not been successful. The Depa:cent will chen accemps co collect on these accounts and will incur small contract collections coses for this accivicy.

Accomplishments

The Federal PLI'S/SLS reinsurance programs have successfully promoced che availabilley of PLI'S/SLS loans for 676,000 students and their parents. Guarantee agencies now operace the PLI'S'SLS loan programs in all 50 Scaces, American Samoa, the District of Columbia, Guam, che Norchern Mariana Islands, Puerco Rico, che Trusc Terricory of che Pacific Islands and the l'irgin Islands.

1989 Budge: Proposal

Gross loan obligacions of 562.9 million are expected for the PLUS/SLS
program in FY 1989. This is an increase of $18 million from che expected
FY 1988 level of $44.6 million. As wich regular loans, PLUS/SLS net
obligations, which reflect collections and ocher receipts, are expected
to increase from $40.4 million in 1988 to 556.2 million in 1989.

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In order to increase default risk-sharing with lenders and guarantee agencies, the Department is seeking the following legislacive amendments for PLUS/SLS and the regular loan program:

o Reduced loan insurance: The lenders Insurance level would be reduced

from 100 co 90 percent in order to incroduce a concrete financial incencive for lenders to pursue greater collection diligence before filing default claims.

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Reduced reinsurance: Similarly, in order to stimulace greater collection
diligence by guarantee agencies, the Federal reinsurance of depaulo
claims by guarantee agencies would be reduced from 100/90/80. percenc co
90/80/70 percent depending on default experience.

The ocher proposed regular loan program improvements would also apply to che
PLU'S/SLS programs.

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1988 and 1989 estimaces assume adoption of proposed legislative changes.

Net Savings to this vic Resulting from Proposed Policy

(dollars in million)

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* Less than $500 chousand

TUESDAY, APRIL 12, 1988.

HIGHER EDUCATION

WITNESSES

KENNETH D. WHITEHEAD, ACTING ASSISTANT SECRETARY FOR POST

SECONDARY EDUCATION SALLY H. CHRISTENSEN, DIRECTOR, BUDGET SERVICE, OFFICE OF PLAN.

NING, BUDGET AND EVALUATION SALLY K. KIRKGASLER, DIRECTOR, POLICY DEVELOPMENT STAFF,

OFFICE OF POSTSECONDARY EDUCATION JOHN S. HAINES, DIRECTOR, POSTSECONDARY ANALYSIS DIVISION, OFFICE OF PLANNING, BUDGET AND EVALUATION

Mr. NATCHER. At this time, we take up the budget request for fiscal year 1989 for Higher Education. We have before the committee Mr. Kenneth D. Whitehead. You have with you there at the table several of your associates. Who do you have with you there?

INTRODUCTIONS Mr. WHITEHEAD. Mr. Chairman, I have Sally K. Kirkgasler, Director, Office of Policy Development, Office of Postsecondary Education on my left. I have Sally H. Christensen, Director of Budget Service, Office of Planning, Budget and Evaluation. I have John S. Haines, Director of the Postsecondary Analysis Division, Office of Planning, Budget and Evaluation.

Mr. NATCHER. Thank you, Mr. Whitehead. Now, we will be pleased to hear from you.

OPENING REMARKS Mr. WHITEHEAD. Mr. Chairman, members of the committee, thank you for the opportunity to present the fiscal year 1989 budget request for the Higher Education account, which totals $450,200,000. This amount is $84,300,000 less than the amount appropriated for Higher Education in fiscal year 1988.

I have a statement I wish to have entered into the record, and I would go on to the highlights before we cover any questions you may have.

The emphasis of our request is on the Federal commitment to address the postsecondary education aspirations of poor and disadvantaged individuals. To meet this commitment, we propose to focus the Federal resources on programs that promote educational opportunities for these disadvantaged individuals.

Specifically, we propose to target funds to those activities which assist historically black colleges and universities in their mission of serving disadvantaged and minority students and which provide support services or financial assistance for disadvantaged students.

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