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TUESDAY, APRIL 12, 1988.

HIGHER EDUCATION FACILITIES LOAN PROGRAMS

WITNESSES

KENNETH D. WHITEHEAD, ACTING ASSISTANT SECRETARY FOR POST

SECONDARY EDUCATION DAVID T. DEXTER, DIRECTOR, CREDIT MANAGEMENT IMPROVEMENT

STAFF, OFFICE OF MANAGEMENT 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. Now we take up next the funding for Higher Education Facilities Loan Programs. We have before the committee Mr. Kenneth D. Whitehead, the Acting Assistant Secretary for Postsecondary Education.

Mr. Whitehead, before you give us your statement, tell us who you have with you at the table.

Mr. WHITEHEAD. I have at the table, Mr. Chairman, Mr. David T. Dexter, Director, Credit Management Improvement Staff, Office of Management in the Department. I have Sally Kirkgasler, Director, Office of Policy Development, Office of Postsecondary Education, on my staff.

I have John S. Haines, Director of the Postsecondary Analysis Division, Office of Planning, Budget and Evaluation of the Department, and I have Sally H. Christensen, Director of Budget Service, Office of Planning, Budget and Evaluation in the Department.

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

Mr. WHITEHEAD. Mr. Chairman, thank you for the opportunity to present the fiscal year 1989 budget request for the three accounts which support through direct loans and other activities the reconstruction, renovation and construction of higher education facilities. These accounts are Higher Education Facilities Loans, and College Housing Loans, and College Housing and Academic Facilities Loans.

Mr. Chairman, I ask that my prepared statement be submitted for the record, and I will briefly summarize our presentation today.

In the coming fiscal year, we are requesting an appropriation for only one of these accounts: The College Housing and Academic Facilities Loans, for which $1,700,000 is requested. We are not requesting any authority to make new loan commitments.

We are making the request under the College Housing and Academic Facilities account in order to make up for the shortfall of the interest rates. We are borrowing money from the Treasury to cover current loans at a higher rate than the loans are made for and, therefore, we have to make this request to cover that shortfall.

That is the extent of my formal statement, Mr. Chairman. We will open this up for questions.

[The prepared statement and biography of Kenneth D. White head follow:)

DEPARTMENT OF EDUCATION

Statement by

Kenneth D. Whitehead
Acting Assistant Secretary for Postseconday Education

on

Higher Education Facilities Loan Programs

Mr. Chairman and Members of the Committee:

Thank you for the opportunity to present the fiscal year 1989 budget request for the three accounts which support, through direct loans and other activities, the reconstruction, renovation, and construction of higher education facilities. These accounts are: Higher Education Facilities Loans; College Housing Loans; and College Housing and Academic Facilities Loans.

If fiscal year 1989, we are requesting an appropriation for only one of these accounts, College Housing and Academic Facilities Loans, for which $1.7 million is requested. In addition, no authority to make new loan commitments is requested under the Higher Education Facilities Loans, College Housing Loans, and College Housing and Academic Facilities Loans accounts.

We are requesting no new loan authority because we believe that the Federal Government should not assume responsibility for financing the capital outlay needs of institutions of higher education or for maintaining their physical plants. Responsibility for this type of fundamental institutional support lies with colleges and universities themselves, State and local governments, taxpayers at those levels, private sector users and beneficiaries of higher education services, and the newly authorized College Construction Loan Insurance Association (Connie Lee). In particular, Connie Lee, with the infusion of $19.1 million from the Federal Government for the purchase of common stock, is now undertaking a significant role in assisting in the financing of institutional construction and reconstruction. with the implementation of Connie Lee we believe that it is no longer necessary to provide loans under any of the facilities loans programs. Let me briefly discuss these programs and changes which have occurred in the structuring of our budget for these accounts.

College Housing Loans

The College Housing Loans account pr ided direct loans for the construction, reconstruction, and renovation of student and faculty housing and related facilities prior to fiscal year 1987.

With the enactment of the Higher Education Amendments of 1986, it became necessary to create a new, separate account (College Housing and Academic Facilities Loans) for loans made in 1987 and subsequent years. Therefore, no new loans can be made from this account.

The main purpose of this account is to receive funds in repayment of loans made prior to 1987 and to make payments of principal and interest to Treasury on funds borrowed to finance these loans. Collections, which are used to redeem Treasury debt, come to the Department from three sources: regular repayments on loans; discounted prepayments of loans; and receipts from the sale of loan assets to the public.

In fiscal year 1989, we anticipate receiving $34.4 million in regular repayments on loans and an additional $204.6 million from the sale of loan assets to the public. With these receipts, no appropriation is required to meet the costs associated with this program in fiscal year 1989. The sale of loan assets to the public 18 contingent upon the Congress repealing the prohibition against selling these loans in 1989.

Higher Education Facilities Loans

We are also proposing to repeal the statutory prohibition against selling Higher Education Facilities Loans in fiscal year 1989. This would permit the Department to realize approximately $25.8 million in revenues in that fiscal year.

As previously noted, no new loans are proposed under this program in 1989.

This 18 consistent with past Federal policy inasmuch as this program has been largely inactive since 1975.

College Housing and Academic Facilities Loans

The most significant change to the facilities programs in fiscal year 1989 is the creation of a new account, College Housing and Academic Facilities Loans (CHAFL), to implement Part F of Title VII of the Higher Education Act. With the enactment of the Higher Education Amendments of 1986, which changed substantially the terms under which the Secretary of Education acquires capital for new loans, it has been necessary to establish this separate account to support loans made in fiscal year 1987 and subsequent years. Since fiscal year 1987, the Department has provided new loans to institutions by borrowing from the Treasury.

The intent of the 1986 amendments was to lower the overall Federal cost of new loans made under this program by raising the interest rate paid by Institutions to 5.5 percent. Under the new statute, the loans made at 5.5 percent cannot be supported by using funds from repayment of prior-year loan commitments. These previous commitments were financed under an existing note with Treasury bearing only 2.75 percent interest. The new authority permits making new 5.5 percent loans only from funds borrowed from the Treasury at a prevailing rate for long-term securities that are 5.25 percent or above.

To support the loans made in fiscal year 1987, the Department borrowed from the Treasury at 8.97 percent. This rate was based upon the average current yield on outstanding obligations of the United States of comparable naturities in the month preceding the month in which the loan commitments were signed.

As a result of the improved financing provisions of the 1986 Higher Education Amendments, the Federal interest subsidy for loans made in 1987 and thereafter will be paid annually by the Department. Under the old College Housing program, the subsidy costs were borne inappropriately by the Treasury and thus were not fully considered in budget allocation decisions. For the duration of the loans originated in 1987 and 1988, the Department must seek appropriations to make up the difference between the interest rate 3t which the Department borrowed from the Treasury (8.97 percent for 1987 loans) and the interest rate which Institutions pay (5.5 percent). For 1989, this shortfall is estimated at $1.7 million.

It 18, for the reasons previously stated, inappropriate for the Department to request further authority to make new loans under this program.

Th concludes my statement. My colleagues and I are available to answer any questions you may have.

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