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REAUTHORIZATION OF THE HIGHER EDUCATION ACT AND RELATED MEASURES

Part 6-Student Financial Assistance: Loans

WEDNESDAY, AUGUST 1, 1979

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON POSTSECONDARY EDUCATION,

COMMITTEE ON EDUCATION AND LABOR,

Washington, DC.

The subcommittee met at 9:45 a.m., pursuant to notice, in room 2175, Rayburn House Office Building, Hon. William D. Ford (chairman of the subcommittee) presiding.

Members present: Representatives Ford, Bailey, Buchanan, and Petri.

Staff present: Thomas R. Wolanin, staff director; Patricia F. Rissler, deputy staff director; William C. Clohan, assistant minority education counsel, and Jennifer W. Vance, minority legislative associate

Mr. FORD. The Subcommittee on Postsecondary Education will now come to order for the purpose of continuing hearings on the reauthorization of the Higher Education Act and related measures.

Our hearing today will continue our discussion of those features of the administration's reauthorization proposal that represent the most significant departures from current law as well as of the consideration of the remaining portions of the Higher Education Act not yet disposed of in these hearings.

Along that line we want to return to where we were before the administration proposal on the loan programs and hear this morning from our colleague from the State of New Jersey, the Honorable Millicent Fenwick, who has a bill pending before our committee. H.R. 4507, to provide for the exchange of information on student loan defaulters with credit bureaus, which will be considered by the committee in conjunction with our examination of the reauthorization of the loan program.

With that, I would like to welcome Representative Fenwick here this morning on behalf of the committee. Do you have a prepared statement?

STATEMENT OF HON. MILLICENT FENWICK, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF NEW JERSEY

Mrs. FENWICK. I have, Mr. Chairman, yes.

Mr. FORD. Without objection, your statement will be inserted in full in the record. You may proceed to add to it or supplement it in any way you feel most comfortable.

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Mrs. FENWICK. Thank you, Mr. Chairman. Thank you for the opportunity of coming before your committee.

The bill, as you know, has been before you for some time. I will not elaborate on its provisions, simply to say that this system has been used in New Jersey by our Department of Higher Education with great success. It costs almost nothing. It has improved the collection of our defaulted student loans to a measurable extent. That is, of course, a problem for the whole country. We have some $4 billion in outstanding loans of which $1 billion are in default. Mr. Nester pointed out in his testimony before the other body, and he has outlined to me in conversations and correspondence, that the present way of granting loans that are somehow not to be repaid is not a service to the students. Very often they begin to accumulate indebtedness which is beyond their capacity and it is much better for them to know at the start that this is serious and that they will be required to pay.

I would like to suggest one thing, Mr. Chairman, if I may. I have an amendment to the bill. I got a very interesting letter from Illinois outlining a system that they have there, allowing more flexibility in the declaration of default. There are those students who may have a serious family problem, illness in the family or something which precludes their paying absolutely on time and the bill should provide that flexibility to the lending institution which would take into account those special individual difficulties that may arise and have nothing to do with desire to avoid a just debt. So, with that small caveat to the bill, itself, I will put this statement in the record and thank you, Mr. Chairman, very much indeed.

[The full statement of Millicent Fenwick follows:]

PREPARED STATEMENT OF HON. MILLICENT FENWICK, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF NEW JERSEY

Mr. Chairman and Members of the Committee: I am happy to appear before this distinguished subcommittee to discuss the responsible repayment of Federal student loans. The steady rise in defaulted student loans is a matter of concern to all of us. A recent report by the Comptroller-General indicates that fully one-fourth of the $4 billion in receivables due the U.S. Office of Education is now in default. Much of this money will simply be written off as uncollectable. When government fails to collect its debts in this way, some people are given benefits to which they are not entitled, and others are cheated. Loan programs are converted to grant programs. And losses to the government of this magnitude can have no effect other than to increase the tax burden and inflate the already oversized budget deficit.

This same report by the General Accounting Office further asserts that the adoption of a practice used routinely in the private sector-the reporting of debtor information to credit bureaus-could prove extremely beneficial to the government in debt collection. Statutory authority already exists for the Office of Education to do this, but despite Secretary Califano's recent call for vigorous action to collect on defaulted loans, no action has been taken up to now.

The potential benefits of reporting defaulted loans to private credit bureaus have been amply and effectively demonstrated in my home state of New Jersey. Since December of 1975, when New Jersey began this practice, fewer loans have entered default, and there has been a marked increase in the number of students making payments on loans which had previously been classified as defaulted. New Jersey has brought its default rate on Guaranteed Student Loans well below the national average.

My bill, H.R. 4507, which has been endorsed by the entire New Jersey delegation in the House, would require that the Commissioner of Education report a defaulted loan to a credit bureau after a reasonable effort has been made to collect the loan and to verify the accuracy of the information. Only the date of disbursement and the amount of the loan, information concerning collection and the date of cancella

tion of the note upon completion and repayment by the borrower would be reported. Cooperating credit bureaus would be required to record promptly any errors or objections raised by the borrower. Another section of the bill, permissive rather than mandatory, would allow the Commissioner to obtain from the credit bureaus information about the location of defaulters.

I would like to emphasize that this bill would authorize the use of credit bureaus-that is, credit data reporting agencies-and not collection agencies. These organizations do not collect money, they merely provide potential credit grantors in the business community with a picture of an individual's overall credit history, so as to be sure that all current indebtedness is considered before additional credit is granted to the individual. According to Mr. William C. Nester, the Director of New Jersey's High Education Assistance Authority, the educational loan "may well be the second largest indebtedness during the lifetime of an individual," surpassing, in most cases, the size of the car loan and exceeded only by the home loan. "Failure to include educational loans as part of a person's credit history creates a distorted financial picture," Nester maintains, and as a result a person can easily become overindebted. "When you allow an individual to become so heavily indebted that he must... declare bankruptcy, you have performed no service for that individual." In other words, including student loans as part of this credit history would not only be beneficial to the government, by providing an incentive for timely repayment of what is owed, but also to the individual, by helping to prevent overindebtedness. There are a few changes and corrections which would improve the bill as it was originally introduced last month. Some are technical in nature and will be supplied later. Most importantly, a provision should be added which would grant discretionary authority to refrain from reporting information about a particular loan in exceptional circumstances. They may be instances where a loan is technically in default, but where there is every reason to believe that the borrower fully intends to repay, though he or she is temporarily unable to do so due to an illness in the family, or some similar problem. The bill as drafted does not allow for such an eventuality, but I think it would be wise to provide for flexibility which now exists in situations where default is accidental and not chronic.

I understand that there are a number of proposals currently under consideration to overhaul the existing student loan programs. Whatever form the programs take, however, as long as there are loans which use Federal capital or are covered by Federal guaranties, there will be a need for incentives for prompt and responsible repayment on the part of the borrower. My legislation contains a simple and sensible proposal which does not involve very much paperwork and which has been proven to be effective in promoting repayment in this fashion. If this system is incorporated into this year's reauthorization of the Higher Education Act, money which will be collected from former students, much of which would otherwise be written off as uncollectable, will be available to help defray the costs of education for students of tomorrow.

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96TH CONGRESS 1ST SESSION

H. R. 4507

To amend title IV of the Higher Education Act of 1965 to provide for the exchange of information concerning defaulting student borrowers with credit bureau organizations to promote responsible repayment of Federal student loans.

IN THE HOUSE OF REPRESENTATIVES

JUNE 18, 1979

Mrs. FENWICK introduced the following bill; which was referred to the Committee on Education and Labor

A BILL

To amend title IV of the Higher Education Act of 1965 to provide for the exchange of information concerning defaulting student borrowers with credit bureau organizations to promote responsible repayment of Federal student loans.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, SECTION 1. (a) Section 430(b) of the Higher Education

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4 Act of 1965 is amended by inserting "(1)" after "(b)" and by

5 adding at the end thereof the following new paragraph:

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"(2)(A) For the purpose of promoting responsible repay

7 ment of loans covered by Federal loan insurance or guaran

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1 tees pursuant to this part, the Commissioner shall enter into 2 cooperative agreements with credit bureau organizations pro3 viding for the exchange of information concerning student 4 borrowers in accordance with the requirements of this para5 graph. Subject to the requirements of subparagraph (C), such 6 agreements shall provide for the disclosure by the Commis7 sioner to such organizations with respect to any loan for 8 which the Commissioner has received a notice of default 9 under subsection (a) of this section of

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"(i) the date of disbursement and the amount of any such loan;

"(ii) information concerning delinquency in the repayment of any such loan, including information concerning the status of any defaulted loan on which the Commissioner has made a payment pursuant to subsection (a) of this section;

"(iii) the date of cancellation of the note upon completion of repayment by the borrower of any such

loan.

"(B) Such agreements may also provide for the disclo21 sure by such organizations to the Commissioner, upon receipt 22 from the Commissioner of a notice under subparagraph (A)(ii) 23 that such a loan is in default, of information concerning the 24 borrower's location or other information which may assist the

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