TUESDAY, APRIL 12, 1988. GUARANTEED STUDENT LOANS WITNESSES BRUCE M. CARNES, DEPUTY UNDER SECRETARY FOR PLANNING, 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 DANIEL SCHECTER, SPECIAL ASSISTANT TO THE DEPUTY UNDER SECRETARY FOR PLANNING, BUDGET AND EVALUATION INTRODUCTION OF WITNESSES Mr. NATCHER. Now we take up Guaranteed Student Loans. We have before the committee Dr. Bruce M. Carnes, Deputy Under Secretary for Planning, Budget and Evaluation. Dr. Carnes, before you give us your statement, tell us who you have with you at the table, please. Mr. CARNES. I have John Haines, Director of the Postsecondary Analysis Division of my Office; and Sally Kirkgasler, Head of Policy at the Office of Postsecondary Education. Mr. NATCHER. Glad to have all of you before the committee. Now, we will be pleased to hear from you. Mr. CARNES. Mr. Chairman, I am just going to ask that you include my statement in the record. I have nothing further to add to that. Mr. NATCHER. All right. The entire statement will be placed in the record. [The prepared statement and biography of Bruce M. Carnes follows:] (949) DEPARTMENT OF EDUCATION Statement by Bruce M. Carnes Deputy Under Secretary for on Guaranteed Student Loans Mr. Chairman and Members of the Committee: I appreciate this opportunity to discuss the Administration's fiscal year 1989 budget request for the Guaranteed Student Loan program. This year we are requesting $2.736 billion to meet the costs of this program, an increase of $170.6 million over the 1988 appropriation level. We believe the Guaranteed Student Loan program continues to be an effective mechanism for financing postsecondary education. Nearly 4 million students will receive over $9.5 billion through the Guaranteed Student Loan, Parent Loans for Undergraduate Students (PLUS) and the Supplemental Loans for Students (SLS) programs in fiscal year 1989. The cost of supporting the GSL program, after taking into account the receipt of student's loan orgination fees, will be approximately $1.5 billion in subsidies for interest and special allowance. These costs have largely been held in check by continued moderation in interest rates. While the primary costs of supporting the program, interest and special allowance, have been brought under control over the past several years, the costs of defaults have increased alarmingly. Of the $2.736 billion we are requesting for fiscal year 1989, well over one half, $1.7 billion will be needed to pay for loans that have gone into default. These increasing default costs are undermining public confidence in the GSL program, taking scarce public resources from other student aid programs, and depriving future students of Federal student aid as more and more of the available resources are diverted to pay bad debts. If GSL defaults constituted a separate program, it would be the Department's third largest. Proposals to Address the Default Problem The Department has taken a number of actions to collect on defaulted loans. In fiscal year 1987 we collected $209 million, $44 million more than fiscal year 1986, and $142 million more than fiscal year 1985. We have taken numerous steps to make the collection apparatus more efficient and cost effective. Similar improved practices by some guarantee agencies have also proven to be successful. However, increasing efforts to collect on defaulted loans will not, by itself, solve the default problem. Last November the Secretary announced that we would take steps to limit program participation of institutions with excessive default rates. Recent studies indicate that some 2,335 partici pating postsecondary institutions, many of which are proprietary schools, have student default rates in excess of 20 percent, with 533 above 50 percent. We hope that before drastic actions are required, institutions will work with us in undertaking extra measures to help prevent defaults. We have recommended that additional steps be taken by all involved parties to prevent loans from going into default. The most efficient default cure is to prevent defaults from occurring. To this end we are submitting, along with this budget request, a number of proposals that we believe will help stem the ever increasing number of defaults. Reduction in Loan Insurance Currently, if a borrower defaults on a loan, a lender is reimbursed for the total principal and interest on the loan. The lender is totally protected from financial loss, and there is little incentive to expend any major efforts in collecting on loans that become delinquent. We propose that the lender share some of the responsibility for defaults by reducing the amount of default payment the lender would receive from 100 to 90 percent. This would result in increased commitment on the part of the lender to pursue due diligence practices in attempting to collect on the loan. Reduction in Reinsurance In addition to the lenders and institutions of postsecondary education, the guarantee agencies have also been insulated from the impact of defaults in the program through the reinsurance provided by the Federal Government. For the most part, agencies are routinely reimbursed for 100 percent of all default claims they have paid to lenders. In addition, if the agencies then succeed in having the borrowers repay their loans after defaulting, the agencies retain at least 30 percent of the sums collected as a collection fee. There is very little financial incentive for guarantee agencies to work with institutions and lenders to help prevent defaults from occurring. We propose to revise our current "trigger system", which provides for a reduction of reinsurance payments to a guarantee agency dependent upon default experience in the agency's State. In addition, overall reinsurance payments would be reduced by 10 percent. This would result in greater liability for agencies which have high rates of defaults in their States and encourage improvements in default prevention. Expanded Use of the National Student Loan Data System Current law authorizes the establishment of a National Student Loan Data System, to maintain records of all transactions in the program. A condition of its implementation is the prohibition against using the data base to determine borrower eligibility. This costly system is not needed for routine program management or research. Implementing it makes sense only if it can be used as a default prevention tool. At present it is literally impossible to monitor whether aggregate loan limits, for example, have been exceeded. We are proposing to eliminate this prohibition on its use and we are requesting funds for the system only on this basis. 54A2 Ability to Benefit A recent study of vocational-technical schools found evidence of widespread abuse of the "ability to benefit" provision of the Higher Education Act. Many schools set no or low admission stardards that enable them to admit students who lack the skills necessary to complete the program. Such students are far more likely to drop out and default on student loans than other students. We are proposing to eliminate this type of abuse by limiting Federal financial assistance to students who possess either a high school diploma or its recognized equivalent. Credit Checks Anyone who wishes to buy a car, refrigerator, house or any other merchandise, large or small, on credit is routinely checked through a credit bureau. Before a lender provides its depositors' funds to any potential borrower, assurances must be obtained that the loan will be repaid. It's a good business practice. Yet, in the Guaranteed Student Loan program we permit individuals to borrow over $50,000 without ever reviewing their credit histories. That's bad business. We propose requiring lenders to routinely check the credit histories of potential borrowers under the program, just as they would with other borrowers. If the borrower has a poor credit history, the loan could be granted only if a credit-worthy cosigner was obtained. Students with no credit history would not be required to have a cosigner. Routine Collection of Identifying Information If a borrower does default on a loan, collection efforts are often hampered by the extremely limited amount of information available on the borrower. We propose requiring institutions to collect information when a student leaves the school that would assist in locating the borrower. Such information would include the driver's license number, the address of next of kin, and the borrower's expected address upon graduation. These proposals along with those we will be presenting to improve accountability in the other student financial assistance programs will help reduce the default problem by lessening the possibility of defaults occurring. I will be pleased to respond to any questions members of the Committee may have on our budget request. 54A |