use for the BEOG program and thereby cut down on the paperwork involved. Mr. Chairman, there is one added feature of our bill which is the way in which it tests need-to determine the amount of loans available to the student and parents. We use the test of an expected family contribution to distinguish between loans of convenience and loans of need. In the case of independent students, an expected self-help contribution is used to make this distinction. Making adjustments in repayment schedules, based on after-college income, recognizes reality-that the extent to which a student can repay is a function of after-college income, not of family income before he went to school. Senator Kennedy and our staffs have been a long time working out our differences and coming to the conclusions represented in S. 1600. I understand, Mr. Chairman, that this committee will soon mark up reauthorization legislation for all existing higher education purposes. I sincerely hope the subcommittee will find the Kennedy-Bellmon bill an attractive alternative to the numerous existing loan programs. In fact, it would please us a great deal to have you incorporate our bill as the loan program in your reauthorization legislation. We would be happy to have our staff work with the subcommittee's staff toward that end. Thank you again for the opportunity to testify today. I am here to support this legislation. It is true that the Senate Budget Committee is in markup this morning, and I will not be able to stay very long. I appreciate the fact that Senator Kennedy will be able to stay and respond to questions, and I leave it in your capable hands, Senator. Senator KENNEDY. Fine. Mr. FORD. Thank you, Senator. We appreciate the fact you are operating on a very close schedule today. We are also appreciative of the fact you were willing to accommodate this committee by appearing on very short notice since we have been striving toward the conclusion of our hearings before the recess, so that that time can be used to draft the legislation. We do appreciate the cooperation you show by coming to this hearing. Mr. SIMON. Mr. Chairman, just one quick question. Basically, I think the thrust of this bill is excellent. You and I have labored a long time on the budget. The one thing that does bother me is the off-budget feature of it. Do you have any reaction to that, as a member of the Senate Budget Committee? Senator BELLMON. Congressman, you and I are in agreement we should keep things on-budget; otherwise, we have a very loose way of knowing what our Federal contribution to the economy is and what the impact of our Federal programs may be on inflation. There is a specific provision of this bill intended to insure that the operation of Sallie Mae will be on-budget, and, therefore, I think this may meet the concern that you so rightly express. Mr. SIMON. I misunderstood, then, and I am pleased to be corrected. I thank the Chairman. Mr. FORD. Thank you very much, Senator. STATEMENT OF HON. EDWARD M. KENNEDY, A U.S. SENATOR FROM THE STATE OF MASSACHUSETTS, ACCOMPANIED BY JAY URWITZ, LEGISLATIVE ASSISTANT ΤΟ SENATOR KENNEDY Senator KENNEDY. Thank you very much, Mr. Chairman. We are enormously grateful for the opportunity of being able to present these views this morning. I welcome the opportunity to work closely with Senator Bellmon, who, as I think the Members, certainly of the Senate and of this body, understand, has been enormously concerned with the financial implications of this legislation, the budgetary implications of it and he has a strong commitment on the educational aspects of of it. We have been joined together in the Senate in a very unique and special bipartisan way with Senators Baker, Boschwitz, Bumpers, Cochran, Cranston, Culver, Danforth, Domenici, Durkin, Helms, Kassebaum, McClure, Metzenbaum, Nelson, Randolph, Riegle, and Simpson, which I think is a pretty broad coalition of not only Democrats and Republicans, but those that might come from different spectrums of their political parties. I think we have hopefully a vehicle here which can strengthen the opportunity for young people to attend universities and also strengthen our educational system. We are honored that Paul Simon will work with us as a strong member of this committee, and as one who has been continually committed to the cause of education. We look forward to working continuously and closely with him in the future, as a member of this committee, as well as with you, Mr. Chairman, and myself as a member of the Education Committee in the U.S. Senate, where I have served now for some 17 years. We made a pledge to the people of this country when, even during the ravages of the Civil War, we passed the first Morrill Act in 1862. We set up the first land grant colleges throughout the States to educate our youth in agriculture and mechanics. We made a pledge to those who risked their lives for our country when, even during the ravages of the Second World War, we passed the G.I. Bill of Rights in 1944. We promised assistance to all G.I.s who returned home and wanted to go to college. We made a pledge to keep our country strong in 1958, when we passed the National Defense Education Act, which strengthened teaching in our schools and colleges and started scholarship assistance to our college students. During the years that you have been in the House, Mr. Chairman, we have renewed our pledge, we have strengthened our pledge, and we have deepened our pledge. We have made great strides in the areas of improving scholarship grants and improving institutional aid. Our focus on these areas, especially that of scholarship assistance, must continue. I would certainly mention my strong commitment to the scholarship assistance. The dependence of the needy on aid to attend school, and the great public good of education, necessitate a strong commitment on our part. Mr. Chairman, I believe that a federally-supported and subsidized loan program can be an important supplement to such efforts. It is the Federal loan program which is the subject of my testimony today. I believe our loan efforts lag behind our other efforts. But I believe that much can be done to improve our loan efforts. The National Student Loan Reform Act builds upon many of the same principles which underlie the National Direct Student Loan program. I think it is important to the members of the committee that we are really building on some very solid foundations, foundations which I know this committee has been reviewing and has had some very legitimate questions, but we were building on a structure, and even though this is a departure, I think we have a sound basis to move from. But the present system contains many features which improve upon our current efforts under that program and the Guaranteed Student Loan program, in this way: It assures the availability of loans to all students who need them. We think this is of very great importance. Second, it assures an amount which will let all students go to college. It will make payback mechanisms more flexible so that students will not be suddenly overburdened just as they graduate, when their incomes tend to be lower. I will get into that in greater detail a little later in my testimony. It will take the loan collection burdens off of the colleges and will cut down on defaults by placing collection responsibility in banking agencies, and I think the members of this committee are very familiar with the comparisons between the rate of collections between the colleges versus the banking agencies. Probably the record of the State of Pennsylvania is really exemplary, I think, in this particular way. It will provide a supplemental loan program for the parents of college students who are not able to meet the expected family contribution. We believe that is important, some relief for the families, themselves, but to do that in a financially responsible way. This legislation will cost the same amount as the current student loan programs, which it is reforming: The National Direct Student Loan and the Guaranteed Student Loan programs, and I will just develop that briefly. Our proposal would work this way: The student loan programsand I think if we refer up to the yellow chart and follow along with the testimony, it might be easier to understand, although these are certainly concepts which are well familiar to the members of the committee. The Student Loan Marketing Association-Sallie Mae-would expand its activities. It will raise funds through the Federal Financing Bank for dispersal, through the State education agencies, to colleges and universities. The financial aid officers at the campuses would provide a loan to every college and graduate student who needs one. Need, and the top amount of the loan, would be determined by this formula: Cost of going to college-tuition, room and board, fees, books, and so forth-minus, Scholarship and other aid-such as work study funds-granted to the student. Those would be deducted, minus, A reasonable parental contribution. This will be calculated in the manner in which the contribution is figured for the Basic Education Opportunity Grant program so the needs analysis will be analyzed. I won't take the time of the committee, but the staff can review in detail about how that formula works with more children at greater income, but it basically builds on the existing system. For instance, if a family is earning $15,000, has one child in college and one who is not, and the cost of college is $5,000, the student would get a BEOG of $1,000 and would have an expected family contribution of $800. Other aid, such as an institutional scholarship or college work-study, would also be included. If there were none, then the student, in this instance, could borrow up to $3,200. The student could borrow less, if, for example, the family decided to contribute more, or if the student used earnings or savings. Such loans would be due after the student graduated from college or graduate school. We have a provision in the legislation if the parent refuses to participate, for example, so it doesn't work to the disadvantage of a child, but that is a detail which can be developed later. They would be payable at 7 percent interest, but no interest would accrue during the time that the student is an undergraduate, nor would interest accrue for undergraduate loans while the student is in graduate school. The 7-percent interest figure is the same as that charged under our biggest loan program, the GSL program. While it is higher than that charged under the NDSL program, which is still at 3 percent, we should remember that the prime rate is now over 12 percent. We are still making a substantial contribution by lending money at the 7-percent rate. The State agencies and Sallie Mae would be responsible for collection of the loans. I mentioned that earlier. They would be able to consolidate various loans that the student had taken into one repayment. They would also be able to provide optional repayment terms to the student-adjusting the time repayment for the size of the loan, graduating the repayment schedule, and providing for much lower payments where a student's income is low. We spell that out in greater detail. There is a good deal of flexibility in this area, both in terms of the time, the rate of payback, also the income of the students, themselves, and we welcome the opportunity for the staffs to develop those formulas with the committee. But we think they particularly respond to both the educational and financial experience of students. Parents would be able to borrow an amount up to the parental contribution from private lenders. This would be a new source of loan availability. This loan would be guaranteed by the Federal Government. Parents would pay the Treasury rate minus 1 percent, while the banks would get the "special allowance" for these loans that they now get under the Guaranteed Student Loan program. This proposal is better able to achieve our educational goals than do the current programs. Today, the simple fact is that nobody can know if he will get the loan he or she might need to go to college. Because of this gamble, many students may not be able to go to college. Because of this gamble, many students are dissuaded from going to the school of their choice. We do not know how many people want Guaranteed Student Loans but are unable to get them. But we know many people are turned away. This is an important point, Mr. Chairman. In certain regions of the country, like the West, few banks participate. You have anywhere from 12 to 15 percent of the students in California, and the Bank of America refuses to participate in this program. This is true in other different regional areas of the country, and we could provide some supplementary information on that program. In certain cycles in the economy, such as the current period, competing demands for capital make loans difficult to obtain in many places. And in all regions and in all cycles, banks have an incentive to lend to better credit risks and those who are more likely to establish other relationships with the bank. Some 70 percent of the loans are made to those who have a prior relationship with the bank. This has been a concern to this committee and our committee over a period of years, and we have made some improvement on that issue, but not as much as we hoped. These people are less likely to need loans than are many who are denied them. We do not yet know what effect some of the 1976 amendments, and the Middle Income Student Assistance Act, have had on the availability of funds to needier students. The likelihood is that these changes will result in a greater focus on those from families with higher income, now that all families can get the in-school interest subsidy. But, even if we simply extrapolate from our latest survey of the income of Guaranteed Student Loan recipients, taken before the 1976 and MISAA changes went into effect, we find that the GSL program has not focused on the neediest-46 percent of the loans went to families with incomes below $15,000, which is the same proportion as those families represent in the population. The NDSL program has more limited funds. These funds are distributed among States in a way which does not always relate to real needs. Needy students in a particular State may have a tougher time getting a loan. The biggest limitation under the NDSL program is simply that at many of the 6,000 schools which award Basic Educational Opportunity Grants, no student can obtain any National Direct Student Loan. Under the National Student Loan Reform Act, students would be assured that they will get a loan to cover their needs, at all eligible institutions, regardless of region, point in economic cycle, or poorer economic background. I think this is a very important aspect of our program, and we commend it. The financial aid officer will commit a loan to the student on the basis of the formula specific to the student, noted above. That loan commitment would be provided for, automatically, through funds generated through the Federal financing bank. On the loan amounts, Mr. Chairman, neither the GSL nor the NDSL programs assure that the funds which are provided are related to the need of the student. Under the GSL program, private lenders can lend up to $2,500 to anyone. This means that the program does not account for the different economic backgrounds of loan applicants. Nor does it |