NEED ESTIMATION ERROR RATE IN CAMPUS-BASED PROGRAMS

Mr. Natcher:

In your budget justifications, you refer to a recent study which indicates a "net error rate" of 77 percent in the estimates of need for campus-based programs. What do you mean by a net error rate?

Mr. Carnes: Campus-based program funds are distributed to students on the basis of financial need. Financial need is the student's cost of education less the amount the student and his or her family can be expected to contribute toward that cost. The Title IV Quality Control Study examined the determination of financial need used in the awarding of campus-based aid. In nearly 50 percent of the cases examined, the level of financial need was overstated. That is, the computed expected family contribution was less than it should have been. Financial need was understated in approximately 27 percent of the cases examined. Thus, the net error rate is estimated to be 77 percent (50 percent plus 27 percent) for the campus-based programs.

Mr. Natcher: What is the error rate for the Work-Study program?

Mr. Carnes: The Department's Quality Control Study reviewed several rather broad financial aid delivery system processes. It examined the information supplied by students on their applications for financial aid as well as institutional procedures and practices with regard to awarding and disbursing aid. Due to the similarities in need determination and award rules, the Study examined the campus-based programs as a single entity rather than separately. Thus, we cannot provide you with a separate corresponding error rate for the Work-Study program.

PROPOSED INSTITUTIONAL ACCOUNTABILITY SYSTEM

Mr. Natcher: Will the institutional accountability system you are proposing have any effect on the error rate?

Mr. Carnes: Our proposed institutional accountability system is not intended to address the problems highlighted by the Quality Control Study. The accountability system which the Department has proposed promotes educational quality through a system of incentives related to annual allocations of program funds. Thus, accountability in this context addresses the overall mission of the institution.

The error rate measures the degree to which Federal financial aid funds were incorrectly disbursed to postsecondary students. In this sense it reflects errors attributable to students who misreport financial aid application information, as well as errors attributable to institutions which used incorrect data in awarding, processing, or disbursing aid, or which did not collect required documentation.

Mr. Natcher: Under your proposed institutional accountability system, would the performance criteria be based on all students, or only those who are recipients of Work-Study funds?

Mr. Carnes: Since the intent of our institutional accountability proposal is to improve the quality of postsecondary education for all students, the effectiveness criteria would be based on the performance or achievement outcomes for all enrolled students.

PROPOSAL TO INCREASE WORK-STUDY MATCHING REQUIREMENTS

Mr. Natcher: What impact do you think your proposal to increase the matching requirements for Work-Study will have on the number of recipients or the size of the award?

Mr. Carnes: Two elements generally constrain the size of WorkStudy awards: the student's financial need and the number of hours he or she is able to work each week. Thus, an increased match will not affect, on average, the size of awards. However, the increased match will increase the pool of available Work-Study earnings, thus providing additional students the opportunity to participate in the Work-Study program.

PROPOSAL TO EXPAND THE INCOME CONTINGENT LOAN PROGRAM

Mr. Natcher: The 1989 budget includes $50,000,000 for income contingent loans. Why are you proposing an expansion of the program when the results of the demonstration program will not be known for several years?

Mr. Carnes: Given the success that the original 10 institutions have had in making the funds available to students, we believe that it is appropriate to permit additional institutions to participate in this program. This would enable the Department to conduct a more comprehensive test of the effectiveness of the income-contingent approach to repayment. While data obtained from the current 10 institutions will serve as a valid test of the general approach, we believe that it is important to expand the number of institutions participating in recognition of the tremendous variability in the types and settings of institutions of higher education. For example, only 2 of the current 10 institutions are west of the Mississippi River. Few are located in urban settings. As a result the generalizability of the results of the pilot are limited. For this reason, we have proposed the expansion to 100 institutions.

Mr. Natcher: The 1989 budget proposed expanding the Income Contingent Loan program by, among other things, lifting the limit on the number of participating institutions and allowing consortia to participate. How many institutions applied for participation as demonstration sites for the program?

Mr. Carnes: One hundred-ten institutions initially inquired about participating, thirty-one institutions formally applied for the Income Contingent Loan program pilot demonstration and ten institutions were selected for awards.

Mr. Natcher: What information do you have on which to base your proposed expansion to 100 institutions?

Mr. Carnes: Given the success the original 10 demonstration schools have had in administering the ICL program, we believe more institutions will want to participate once we remove the current 10-school limitation. We are convinced that the program will become increasingly popular as the education community recognizes ICLs as a viable supplement to other financial aid.

Mr. Natcher: If consortia were not eligible, would there be enough individual institutions interested in participating in the expanded program?

Mr. Carnes: Yes. When we first released word about ICLs to the education community, 110 schools initially expressed interest in participating. However, we think that eligibility of consortia would be beneficial in that it would encourage institutions to participate without incurring as heavy an administrative burden as borne by individual institutions.

INSTITUTIONAL AUTHORITY TO SELL ICLS

Mr. Natcher: The budget justifications include a proposal to allow institutions to sell income contingent loans. Who do you see as likely purchasers of these loans?

Mr. Carnes: We anticipate that the same secondary markets that now purchase GSLs would be likely to buy ICLs, if permitted.

EVALUATING STUDENT PREFERENCE FOR LOAN TYPE

Mr. Natcher: In evaluating the income contingent loan demonstrations, is the Department gathering information that would allow evaluation of student preferences for such loans?

Mr. Carnes: The Department will begin gathering such evaluation data very shortly by distributing an evaluation questionnaire to institutions. This questionnaire will inquire about individual student preferences and will be given to students who received, rejected, and were not offered income contingent loans.

FEDERAL SUBSIDY LEVEL OF PERKINS LOAN PROGRAM

Mr. Natcher: The 1989 budget requests no new Federal capital contributions for the Perkins Loan program because you claim that the Federal subsidy is in "excess of necessary levels." What is the necessary level of subsidy and how did you determine it?

Mr. Carnes: The interest rate for the ICL program is currently about 9 percent (91-day Treasury bill rate, plus 3 percent). An interest rate that is comparable to this unsubsidized rate would also be appropriate for Perkins Loans, which presently have a 5 percent interest rate.

Mr. Natcher: If you feel the subsidy is too high in the Perkins Loan program, why not propose a change in the interest rate for these loans, rather than eliminating the Federal contribution?

Mr. Carnes: In previous legislative proposals we have suggested raising the interest rate for Perkins Loans but the Congress has not given its support to the idea. Our current proposal to eliminate the Federal contribution is based on our estimate that approximately $718,000,000 will be available for new loans in 1989-90 from repayments and from Federal cancellation payments. These amounts should be sufficient to provide new loans to students without the influx of additional Federal contributions.

Mr. Natcher: If your request for no new Federal capital contributions were adopted, do you have an estimate of how many fewer borrowers there will be in 1989?

Mr. Carnes: We estimate there will be 168,000 fewer borrowers. However, we believe that these borrowers would participate in an expanded ICL program, or apply for Guaranteed Student Loans.

Mr. Natcher: You state the Perkins Loans do not adequately emphasize the importance of access to education and educational choice compared to Income Contingent Loans. What is the income distribution for Income Contingent Loan borrowers compared to Perkins Loan recipients? Do you have any idea?

Mr. Carnes: The Income Contingent Loan program improves access to education and educational choice by providing an additional resource for financing educational costs, particularly for students attending private colleges, or students who plan to enter lowerpaying occupations. We do not have a distribution of income for borrowers under the ICL program as we have not yet completed a full year of operation and received institutional reports. However, we intend to make such a comparison as soon as data are available.

PROPOSAL TO ELIMINATE THE STATE STUDENT INCENTIVE GRANT PROGRAM

Mr. Natcher: Your budget request this year again proposes elimination of the State Student Incentive Grant (SSIG) program. Since Congress did not go along with this request last year, do you have any new information or arguments to justify elimination of the program?

Mr. Carnes: Updated program data for each passing year provides additional support to our view that the SSIG program has fulfilled its purpose of encouraging States to expand their student assistance programs. We have noted previously that the $1.8 billion that States will spend for these programs this year represents a four-fold expansion, since the inception of the SSIG program, of State commitment to assist postsecondary students. What should be emphasized, however, is that State expenditures have continued to increase even during the years in which Federal SSIG funding declined or remained at the same level as the previous year. The following chart illustrates the degree to which the steady growth in State programs has been independent of the level of Federal funding.

Mr. Natcher: Do you have any estimates of the total student aid that is generated by the State Student Incentive Grant program?

Mr. Carnes: The SSIG program has helped generate the $1,800,000,000 that States plan to spend for grant assistance to students in academic year 1987-88.

IMPACT ON STATE AID PROGRAMS OF ZERO FUNDING SSIG IN 1989

Mr. Natcher: Without the Federal student incentive grant funds, how would State need-based awards be affected in 1989?

Mr. Carnes: The withdrawal of Federal SSIG funding, which now accounts for only 4 percent of the total State expenditure for student grants, would have minimal impact. Most States have indicated that the withdrawal of Federal SSIG support would have no effect on their own commitment to providing student aid. Ten States have reported that their legislatures may even appropriate an additional amount for student aid to compensate for the lost Federal funding.

Mr. Natcher: In your budget justifications, you indicate that most States overmatch Federal dollars for the State Student Incentive Grant program. How many States' need-based grant programs are based solely on the Federal program?

Mr. Carnes: Nine States have reported that they will not contribute significantly more in academic year 1987-88 than is necessary to satisfy the requirement to match dollar-for-dollar their Federal SSIG allotments. The remaining States project expenditures that will significantly overmatch their Federal allocations.

Mr. Natcher: Without the Federal funds, would these States have to set up a completely new administrative procedure in order to continue to distribute State funds?

Mr. Carnes: No new administrative procedures would be required. To the contrary, the withdrawal of Federal funding would allow States to simplify their accounting, reporting, and fiscal control procedures.