1/ State allocation is based on the State's relative share of the national

population of students eligible to participate in the State Student Incentive Grants program.

21 No funds are requested for this program in 1989.
3! Includes Palau, American Samoa, the Northern Mariana Islands, and the

Freely Associated States.

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 SECRE

TARY 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:)

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DEPARTMENT OF EDUCATION

Statement by

Bruce M. Carnes

Deputy Under Secretary for
Office of Planning, Budget, and Evaluation

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 post secondary 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