Acting Deputy Under Secretary for Management, Deputy Under Secretary for Planning, Budget and Acting Director of Administration, National Director, Office of Planning and Budget, National Assistant Director, Office of Planning, National Program Specialist, Graduate Fellowships, Office Program Analyst, Planning Staff, Postsecondary Assistant Professor, English, James Madison Superior achievement award, National Endowment Outstanding performance rating; highest allowable Outstanding performance rating and merit increase 54A4 Cash Award for outstanding management, National Nominated for outstanding performance in Graduate Received the highest performance ratings for Merit-based teaching assistantship, Indiana Merit-based scholarship, University of Colorado, 54A5 PROPOSALS TO REDUCE STUDENT LOAN DEFAULTS Mr. NATCHER. As you have indicated, Dr. Carnes, there are a number of proposals currently under consideration aimed at defaults in the Guaranteed Student Loan Program. Do you see any quick solution to the student loan default problem? Mr. CARNES. Actually, yes, I do. I think there are some things that can be done very quickly that would have an immediate effect on bringing down the default rate. Those include reducing lender insurance and guarantee agency reinsurance, removing the restrictions on the national student loan data bank, closing the ability-tobenefit loopholes, and a number of other provisions which we will be submitting to Congress in the next week or two in an accountability legislative package. PROPORTION OF STUDENT AID LOANS TO GRANTS Mr. NATCHER. Do you think that the Federal Government has gone too far in emphasizing loans rather than grants in helping students attain a college education, Dr. Carnes? Mr. CARNES. No, I don't. I think that a recent study done by the Joint Economic Committee concluded that of people who borrowed to finance their educations, that the debt burden did not constitute a major problem for them. A recent study done by the Massachusetts Higher Education Assistance Corporation, I believe it is called, by Joe Cronin, concluded the same thing, that the students who borrowed to go to college did not experience significant difficulties in repaying their loans. It is quite true that the balance between loans and grants has shifted, and our proposal would somewhat address that. In fact, there is a more significant growth in grants than there is in loans under our proposal. But the fact remains that the typical college graduate gets a tremendous financial benefit from having gone to college. That benefit is so sizable that it outweighs almost any amount you could conceive of that a person would have to borrow to go to college. PROPOSED LEGISLATIVE CHANGE-ABILITY TO BENEFIT Mr. NATCHER. Do your funding estimates for 1988 or 1989 assume any changes in the basic law for the Guaranteed Student Loan Program, Dr. Carnes? Mr. CARNES. I will ask my colleagues to amplify on this, but essentially we are not proposing significant changes in these programs, with the exception of an eligibility issue related to ability to benefit. STUDENT LOAN DEFAULT PROBLEM-PRIVATE CAREER SCHOOLS Mr. NATCHER. Recently, Department officials have pointed to abusive practices by private career schools as part of the default problem under the Guaranteed Student Loan Program. Has the Department disqualified or suspended the eligibility of any such institution from participating in the Federal student aid program? Mr. CARNES. When we announced this policy last November, we indicated that we would undertake an immediate review of those institutions that had default rates in excess of 50 percent. We have begun that process and in some areas of the country, we have completed those reviews. A number of cases have been referred to the Inspector General and to date, as a consequence of that particular policy, the process is still ongoing. So the answer with respect to that is no. There have been, of course, throughout past years, institutions that have been removed from eligibility in the program. Mr. NATCHER. What proportion of Federal default costs do you attribute to borrowers that attended private career schools? Mr. CARNES. Let me answer it this way: We think that 85 percent of the defaulters at schools with default rates over 50 percent are in the proprietary sector. The vast majority of problems occur in the proprietary sector when you use 50 percent as your cut-off. The fact is that there is a greater dollar volume of loans at other institutions but this sector has grown immensely and we see, generally speaking, higher default rates in that sector than elsewhere. STATUS OF REGULATIONS ON STUDENT LOAN DEFAULT INITIATIVE Mr. NATCHER. What is the status of the regulations concerning your initiative to eliminate schools with default rates over 20 percent from participation in the Guaranteed Student Loan program? Mr. CARNES. We are developing an NPRM which I expect to have published in the next couple of weeks. It will be out for comment, and we hope to have a final regulation in June or July. RELIABILITY OF INSTITUTIONAL DEFAULT STATISTICS Mr. NATCHER. What steps are now being taken by the Department to assure the reliability of institutional default statistics when this initiative becomes operational? Mr. CARNES. It is a very good question. The data that we have used heretofore are data that we want to improve on. It is sufficiently good that it is the data base that we use to make our payments to guarantee agencies. So it is good enough for that purpose. They are content with it from that point of view. As a result, I believe, of congressional action in 1987, guarantee agencies are required now to report information on both loans and default status, as well as loans and repayment status, so we will have a much more even quality data base when it comes to the data that we will use for actually implementing the policy. We don't think, if I might add, Mr. Chairman, we don't think that the improvement in this data base will change the basic picture. It amounts essentially to fine-tuning what is already on the TV screen. We can see the program. We can hear them, and we know what is going on. This will fine-tune it, but it isn't going to change the fundamental outlines. DUE DILIGENCE REGULATIONS-LENDER AND GUARANTEE AGENCIES Mr. NATCHER. What is the status of your enforcement of the new "due diligence" regulation for lender and guaranty agencies? Mr. CARNES. As recently as two months ago, we entered into protracted discussions with the lending and guarantee community concerning those regulations. It developed that there were uncertain ties on the part of some lenders as to what they were, in fact, going to be required to do under those regulations. That is because lenders were, in some cases, given conflicting instructions from different guarantors. As a result, some lenders found themselves liable for considerable losses under the program. What we did was to meet with them to arrive at a mutually satisfactory arrangement concerning the cure of these defaults which will resolve their problems. In addition, we have made it clear that in the future, we are still going to insist on their following these regulations, but we are going to interpret them broadly. Fair enough? PROGRAM REVIEWS-STATE GUARANTEE AGENCIES Mr. NATCHER. How are your regular program reviews of State guaranty agencies conducted? Mr. CARNES. Let me ask Sally to answer that. Ms. KIRKGASLER. There is not a specific schedule. We try to do them as frequently as possible, but that is contingent on the number of resources we have. We also try to prioritize. If it has come to our attention there may be a problem somewhere, that institution goes to the top of the list and somebody may go to the bottom, so there is not a rigid schedule. Mr. NATCHER. Once a year? Ms. KIRKGASLER. Not that frequently normally, no. A little more than five years would be more likely. PROGRAM REVIEWS-INSTITUTIONS WITH HIGH DEFAULT RATES Mr. NATCHER. What is the status of program reviews the Department is undertaking of institutions with default rates over 50 percent? Mr. CARNES. We are considering reviews done as recently as October 1986 to be still valid. So far we have completed 177 reviews. There are a number of institutions that have subsequently closed or gone bankrupt or were already under IG investigation. We still have a number of institutions to review, but we had already referred a number of these, as I say, to the Inspector General. Mr. NATCHER. Mr. Conte, I yield to you. Mr. CONTE. Thank you, Mr. Chairman. RECOVERY OF STATE AGENCY EXCESS RESERVES I want to start by asking about the specific GSL provision in the budget summit agreement last year. That provision called for the recovery of $250 million in excess reserves in State agencies. Is it proceeding on track, and what steps has the Department taken to implement the recovery? Mr. CARNES. Mr. Conte, it is on track so far. I am pleased to say that Kentucky has already paid back their excess reserves and Massachusetts has agreed to pay back their excess reserves. On the other hand, four States have filed suit against us, and 36 have appealed our action. Now, we gave them until March 15 to appeal. We are going to review those appeals and we are going to make decisions. Our |