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proper Federal management at the outset, we would not be in the situation that exists today. Can we be sure that future administrations will be equally committed to the task of collecting loans? We would hope so but there is no guarantee.

States which administer their own guaranteed student loan programs have demonstrated their ability to effectively manage such programs as is evidenced by the significantly lower default rates in that program.

We recognize that some institutions have not properly managed their NDSL funds. However the Federal Government has to share in the blame for this poor management. Until recently, institutions received only minimal help from the Federal Government in their collection efforts. Often, regulations are years late in being published. It took over 2 years to implement the 1976 amendments permitting institutions to turn over defaulted national direct student loans to the Office of Education.

Further we are still awaiting the tool most needed to assist institutions in their collection efforts, the reinstatement of the IRS skip-tracing procedures.

On the other hand, the administration understands that many of our institutions would be delighted to get out of the collection business, since they believe their resources could be used in other ways. Unfortunately, it is again a mistake to assume that this is the case for all schools.

In fact we believe that institutions can effectively collect student loans provided they take their collection responsibilities seriously. The administration would lead us to believe that such is not the case. However, unfortunately, their own data does not substantiate this line of reasoning. We have information based on OE's own loan data which shows that institutions which collect their own notes have a lower average default rate than those which utilize outside servicing. We think that if institutions have no responsibility for collecting their loans, they may in fact neglect their duties, thus only contributing to an even higher default rate.

This information has not been released publicly and perhaps you would like to ask the Office of Education to provide you supplemental data from the recent FISL file on those that do their own collection, some preliminary results we have seen would show that 4-year public institutions that do all their own have an average default rate of 12 percent, those that are doing it outside have a rate of 23 percent.

For your private institutions the average is 13 percent whereas those using outside service it is 18 percent and so on and so forth by each of the sectors.

In summary we feel that it is very important that the institutions be involved in the responsibility of managing these funds. The loan portion of the administration's proposal needs close scrutiny to determine whether federalizing the loan servicing and collections is the best approach to administer these programs.

Mr. Chairman, in the interest of time, let me quickly mention several other items contained in the administration's proposal to which we object. The administration would reduce the current 9month grace period to 4 months. We object to this on the basis that students need time after completing their education to locate a job

and get settled in a new living environment before beginning to repay their loan obligations. The 9-month grace period has served us well and is not an unreasonable period of time. We also would suggest that the cumulative maximum in the basic loan program be increased to $15,000 since the annual maximum proposed is $3,750. The $12,500 maximum they propose only depresses the annual amount and is unnecessary. How it was arrived at is unbeknownst to me.

We also take exception to the administration's characterization of the role that Sallie Mae has played. If one reviews the legislative statutes and charges of this corporation we think that Sallie Mae has successfully fulfilled their role. If it is the desire of this subcommittee to change the role of Sallie Mae, this can be done by modifying the existing statutes rather than establishing a new, unproven association.

Finally, Mr. Chairman, we wish to make one other point. The administration's proposal would transfer institution's collections on their existing NDSL accounts to the basic loan program. This would mean that many institutions could potentially be giving up more dollars than they would receive under the allocation scheme proposed by the administration.

Since the administration's proposal is subject to annual appropriations, there is no assurance that loan capital will be more available. In fact, the administration's proposal, unlike the Kennedy/ Bellmon proposal, which you will hear more on tomorrow, is a hollow promise that does not provide the American people with an increased assurance of loan availability.

In closing, Mr. Chairman, I am sure you have noted that we are less than enamored with the administration's loan proposal. Considering the testimony which has been presented to this subcommittee to date, it appears that students, institutions, State agencies, and the American people would be better served if we allow the existing programs to develop, mature, and be refined in accordance with the recommendations suggested by the majority of witnesses who have appeared before this subcommittee.

Thank you, Mr. Chairman, for the pleasure of being here. I will be happy to answer any questions that this committee may have later in this hearing.

[Prepared statement of Dallas Martin follows:]

TESTIMONY BY DALLAS MARTIN, EXECUTIVE Director, the NATIONAL ASSOCIATION OF STUDENT FINANCIAL AID ADMINISTRATORS

Mr. Chairman and members of the Subcommittee, it is indeed a pleasure to have the opportunity to appear before you today to discuss the Administration's proposals to modify the student loan programs.

As you know, the student loan programs have been the subject of much debate in the past several months, and, unfortunately, many of the facts and significant features of the programs have been distorted, misreported, and taken out of context. Consequently, persons not familiar with the detailed operations of these programs are often led to believe that the existing student loan programs, specifically NDSL and GSL, are not working and, therefore, should be substantially modified or replaced by new approaches and new mechanisms. Obviously, from the proposals advanced, the Administration is also of the opinion that a complete overhaul is needed.

It appears to us that, in general, the Administration has eliminated the NDSL program, changed the GSL program to be the new "basic loan" program, and replaced the GSL program with a new "supplemental loan" program that seems

tailored after the HEAL program which is currently funding medical and health profession students.

These proposals are advanced by the Administration as necessary to insure adequate capital availability, reduce governmental costs, improve collections and reduce defaults. However we question whether any of these objectives will be achieved under the Administration's proposals. In fact, we suggest that with slight legislative modifications, timely administrative support from the Office of Education, and insured program stability, two of the Administration's objectives could be achieved.

The third objective which the Administration purports to resolve is to reduce governmental outlays for the loan programs. Unfortunately, the suggested approach would simply transfer the costs from the federal government to the individual student and his/her family.

In addition, Mr. Chairman, we are very concerned about the impact these proposals will have on students. The Administration would ask students and their parents to pay a substantial rate of interest in order to receive a supplemental loan. The Middle Income Student Assistance Act was specifically intended to help middleincome families by removing the income limit in order for a student to qualify for interest benefits. The Administration's proposal would take away this benefit recently enacted by Congress.

Let us look at some examples of how the Administration's proposals would affect students. A student from a low-income family may be affected in two ways. First the $700 self-help requirement may not be available since many students from such families are unable to find employment or must devote all their time to their studies. While provisions would be made to waive the self-help requirement, it could impose a barrier to the neediest students. Second, these students would pay 7 percent interest rather than 3 percent as is currently the situation in the NDSL program. If a student were to borrow $5,000, the total interest paid by the student would increase from $768.80 to $1,712.81, an increase of $944.01.

Students from moderate income families would be even more seriously affected. While they are generally eligible for a Basic Grant to cover part of their educational costs, many still find it necessary to borrow to help meet the expected parental contribution. Currently, the interest on these loans (GSL) is paid while the student is in school and the student pays 7 percent interest during repayment. Under the Administration's proposal, these students would pay interest at the Treasury bill rate plus 1 percent, or approximately 11 percent at the current rate. Thus, a student borrowing $2,500 for each of his/her four years in school would incur approximately $2,750 in interest costs while attending school. An amount, I might add, which is currently paid by the government. This interest could either be deferred until the repayment period, or the loan increased to cover the interest costs. Thus, the needy student has to incur an increased cost of $2,750 while in school in order to obtain his/her education, assuming they have funds available to pay the interest while in school. If not, the interest is deferred thus increasing even more the costs to the student.

Students from upper middle income families who generally do not qualify for a Basic Grant or other federal assistance, unless they attend a high cost institution, currently rely almost entirely on the Guaranteed Student Loan Program. Under the Administration's proposal, such students and their families would have to pay interest on the loan from the day the promissory note is signed. Therefore, these students would lose the benefits they recently received under the Middle Income Student Assistance Act. In fact, they would be worse off than before MISAA since the interest rate under the supplemental loan program would be approximately 11 percent (assuming the current Treasury bill rate) rather than 7 percent. Thus, these students are significantly affected by these proposals. In fact, a student who borrows $2,500 per year to replace their family contribution, would be forced to pay $2,211.88 more than under the current law during the repayment period.

Further, graduate students enrolled in health professions, business or law are currently eligible to participate in both NDSL and GSL. Under the Administration's bill they would be adversely affected. In fact, they would be excluded from the Basic Loan proposal entirely. Under the Administration's plan, they could borrow funds, but only under the supplemental loan program which requires a higher interest

rate.

While it is true that the Administration's plan would reduce the costs which the government is currently paying for the loan programs, they would be doing so at the expense of parents and students. Further, I would like to remind the Administration that less than one year ago we were faced with the choice between tuition tax credits or increased student aid in order to respond to the plea from the middleincome families having difficulty meeting the costs associated with paying for their

children's postsecondary education. At that time, this Congress and the Administration chose to support the Middle Income Student Assistance Act. One reason for this was that in the long run, such outlays would be less costly and manageable since they are on budget. In addition, the increased student aid dollars directed the majority of the dollars to students with the greatest financial need. If my memory serves me correctly, it was anticipated at that time that the tuition tax credit legislation would grow to approximately four to six billion dollars in annual outlays. At that time, the Administration was more than willing to support, and subsequently to sign, the Middle Income Student Assistance Act. Now, we find ourselves less than one year away from the enactment of this legislation and faced with the same administration now concerned about the growth in the very program which was designed to assist middle-income families. Mr. Chairman, I am sorry if I sound too critical, but unfortunately this is not an issue we view lightly.

We also encourage this committee to examine carefully who can best administer student loan programs. Will the performance under a federalization of loan servicing and collection really be better than the performance by institutions or state agencies? The current Administration has made positive moves to bring the default rate under control in the Federally Insured Student Loan Program. However, several previous Administrations ignored the problem of loan defaults, thereby creating today's high default rate. With proper federal management at the outset, we would not be in the situation that exists today. Can we be sure that future Administrations will be equally committed to the task of collecting loans?

States which administer their own Guaranteed Student Loan Programs have demonstrated their ability to effectively manage such programs as is evidenced by the significantly lower default rates in that program.

We recognize that some institutions have not properly managed their NDSL funds. However, the federal government has to share in the blame for this poor management. Until recently, institutions received only minimal help from the federal government in their collection efforts. Often, regulations are years late in being published. It took over two years to implement the 1976 Amendments permitting institutions to turn over defaulted National Direct Student Loans to the Office of Education. Further, we are still awaiting the tool most needed to assist institutions in their collection efforts the reinstatement of the IRS skip-tracing procedures. On the other hand, the Administration understands that many of our institutions would be delighted to get out of the collection business, since they believe their resources could be used in other ways. Unfortunately, it is again a mistake to assume that this is the case for all schools. In fact, we believe that institutions can effectively collect student loans provided they take their collection responsibilities seriously. The Administration would lead us to believe that such is not the case. However, unfortunately their own data does not substantiate this line of reasoning. We have information based on OE's own loan data which shows that institutions which collect their own notes have a lower average default rate than those which utilize outside servicing. We think that if institutions have no responsibility for collecting their loans, they may in fact neglect their duties, thus only contributing to an even higher default rate.

In summary, the loan portion of the Administration's proposal needs close scrutiny to determine whether federalizing the loan servicing and collections is the best approach to administer these programs.

Mr. Chairman, in the interest of time, let me quickly mention several other items contained in the Administration's proposal to which we object. The Administration would reduce the current nine month grace period to four months. We object to this on the basis that students need time after completing their education to locate a job and get settled in a new living environment before beginning to repay their loan obligations. The nine month grace period has served us well and is not an unreasonable period of time. We also would suggest that the cumulative maximum in the basic loan program be increased to $15,000 since the annual maximum proposed is $3,750. The $12,500 maximum they propose only depresses the annual amount and is unnecessary. We also take exception to the Administration's characterization of the role that Sallie Mae has played. If one reviews the legislative statutes and charges of this corporation, we think that Sallie Mae has successfully fulfilled their role. If it is the desire of this Subcommittee to change the role of Sallie Mae, this can be done by modifying the existing statutes rather than establishing a new unproven Association.

Finally, Mr. Chairman, we wish to make one other point. The Administration's proposal would transfer institutions' collections on their existing NDSL accounts to the basic loan program. This would mean that many institutions could potentially be giving up more dollars than they would receive under the allocation scheme proposed by the Administration. Since the Administration's proposal is subject to

annual appropriations, there is no assurance that loan capital will be more available. In fact, the Administration's proposal, unlike the Kennedy/Bellmon proposal, which you will hear more on tomorrow, is a hollow promise that does not provide the American people with an increased assurance of loan availability.

In closing, Mr. Chairman, I am sure you have noted that we are less than enamored with the Administration's loan proposal. Considering the testimony which has been presented to this Subcommittee to date, it appears that students, institutions, state agencies and the American people would be better served if we allow the existing programs to develop, mature and be refined in accordance with the recommendations suggested by the majority of witnesses who have appeared before this Subcommittee.

Thank you, Mr. Chairman, for the pleasure of being here.

Mr. FORD. Mr. Gibson.

STATEMENT OF JERRY GIBSON, CONSORTIUM ON FINANCING HIGHER EDUCATION

Mr. GIBSON. Mr. Chairman and members of the committee. Thank you for the opportunity to appear before you. We also would like to thank you for your continuing leadership and your mastery of material of student aid. I would like to take just a brief moment and try to position our group of schools vis-a-vis the administration's proposal.

In our testimony before you we asked that the loan program be held as a kind of an evolving mechanism for student financial aid and that we try to avoid abrupt changes. In that testimony we supported a loan of need and we supported a supplemental loan which we conceived as primarily a parental loan.

The loan of need we assumed would represent an expansion of the NDSL loan program and the supplemental loan we thought would be a loan made to parents at market rates. Just a word about the loan of need.

We testified about the importance of consolidating the various programs, simplifying them both for the understanding of the student and understanding of the lenders for ease of administration. The 7-percent rate that we supported at that time represents not so much a comparison to other existing rates as a consideration of the fact that borrowers get a significant income tax deduction for the interest that they pay. In addition, in a time of inflation, if we ever get back to the point where we have only a 5- or 6-percent inflation rate, then we will have, in effect, an interest-free loan to students even if we make it at the 7-percent rate.

We talked about the supplemental loan for parents and the comparison between the existing opportunities and the opportunities they would have under that proposal. It is clear that parents are grateful for the interest subsidy to an amount of $2,500, but there are many families that need to borrow more than $2,500. The proposal that we made is that they be able to borrow up to the amount of the parental contribution and at the market rate. Let me say a word about that.

It is more important in our experience for a family to be able to borrow up to the $4,000 or $5,000 or $6,000 that it needs in order to pay the bills and to have the interest deduction on their income tax. With the interest deduction, the actual rate that they pay will be in the neighborhood of 5 to 6 percent. Over the period of 5 to 10 years, as they repay the loan in a period of inflation, it comes very close to being an interest-free loan. They are repaying with dollars

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