The real purpose of the 3.5-percent allowance is to reimburse GSL lenders for their origination and servicing costs and to allow a reasonable profit on their activity. But some portion of the allowance, although the amounts are still probably small in a relative sense, is going to finance State arbitrage gains. Even if that issue is ignored, there still remains the question of whether the Government could obtain student loan origination and servicing for an annual cost of less than 3.5 percent of the capital in the system. Considering origination costs first, they now include for every guaranteed loan the participation of both a lending institution and an educational institution. But since the Government is paying all the costs of putting up the capital, the role of the bank in such a loan is actually superfluous. The loan can just as well be originated by the educational institution alone.

Second, it is demonstrable that servicing costs are well below 3.5 percent of the capital being serviced. Sallie Mae has servicing contracts with four banking institutions and one State agency. The costs range from about $11 per year for borrowers who are still in school to a high of $27 per year for borrowers in repayment status. If the Government were the owner of the student notes, it too could contract out for loan servicing, presumably on terms at least as favorable as those negotiated by Sallie Mae. In short, it would pay $11 to $27 a year instead of $70 a year on the estimated average guaranteed student loan now being made.

The remaining element of the current system cost is the loss from defaults. The long-run costs involved are difficult to estimate with any precision. While claims paid on defaulted GSL's are a known amount-about $200 million last year-it is impossible to state how much the Government will eventually collect from the debtors whose defaults gave rise to the claims, just as it cannot yet be known how much the Government will realize from its current effort to obtain payment from NDSL defaulters. But it does seem safe to predict that default losses will decline in proportion to the amount of effort the Government-with its superior ability to locate defaulters-puts into the task. Whether there will be a net budget gain from the Government's efforts remains to be seen. All the foregoing suggests that it would be useful for the Congress to consider reshaping the system to acknowledge the reality of the Government's present role in raising the necessary capital. One possibility would be to federalize Sallie Mae, to have it be the conduit by which the funds would flow to State lending agencies, who would be the retailers, so to speak, in dealing with the educational institutions that would originate all student loans. There are many other ways in which the system could be restructured to the same end.

I will conclude this statement with a brief discussion of the borrower subsidies in the present student loan systems. As I mentioned earlier, there does not appear to be a sound analytical basis for continuing to have one program with a 3-percent charge and another with 7 percent. Indeed, the differential introduces questions both of fairness and practicality, as well as of cost. The fairness issue arises because the effect of the differential is that students in like circumstances are treated in an unlike fashion. The practicality issue comes about because, with two different in

terest rates, it is virtually impossible to consolidate loans when-as is often the case-a borrower has both a GSL and an NDSL when he reaches repayment status. Without suggesting what the interest rate ought to be, whether 7 percent or something else, there ought to be just one basic rate.

My second comment grows out of last fall's legislation that extended the inschool interest subsidy to every GSL borrower, irrespective of family income. We cannot yet know the costs and program implications of that change, but they may turn out to be severe, with costs rising when loans are readily available, and lower-income borrowers crowded out when loans are rationed. It is probable that a great many families with liquidity problems in financing their children's college costs, but who are fully able and willing to pay, say 7 percent, for the privilege of stretching those costs over time, will arrange to have their children take out the interest-free loans. The Congress might well consider adopting an explicit program for such families, with the interest subsidized for those who fell below a stated income level, or who have already qualified for any other need-based aid, and 7-percent loans for those who choose not to supply family income information.

Finally, I want to reemphasize that the short-run outlook for the GSL program is extremely clouded. When the impact of the special allowance ceiling occurs a month or so from now, you may be asked to turn aside from your deliberations about the long-run shape of student loan programs and do something quickly about the short-run shape.

Mr. Chairman, that concludes my prepared statement.

Mr. FORD. Thank you. It is very clear that some of the administrations rationale for their proposed consolidated loan programs, which we still have not seen, need study, given the objectives you have set forth, and the problems with the present system.

I am happy to see CBO doing this, because one of the frustrations that my predecessor and I have expressed as chairman of this committee is that for years we have been fighting successive administrations over reductions in NDSL money without any real basis for arguments, because, we have been doing it for a long time, we have hunches but we have been flying by the seat of our pants. Who will be affected? We do know that the distribution of the money is very uneven across the country. Many of us are forced to evaluate the validity of continued capital investments in that area on the basis of very imperfect information and a lot of hunches on the kind of institutions that are using it.

Tied into that, however, is this question, and that is something we were not able to determine during the last Congress when we were considering the changes in the "Middle Income Student Assistance Act" as it came to be known. With the advent of BEOG's in 1972, it does appear there was a shift in work-study from the low-income student to a higher-income bracket. One might reasonably assume the same sort of thing happened with respect to NDSL. Where NDSL was a principal source of tuition payments, for example, and of basic costs for the low-income student, that was replaced for some low-income students by BEOG's which then caused money to shift into a different population on campus and started moving upward.

We had some discussions about this a few years ago with respect to the terrible condition in student loan defaults and the fact that there had not been any effort to collect them. As we looked at the figures on the default rate, we became conscious of the fact that, for the years involved in the borrowing, we were talking about the very lowest income group on our college campuses as the borrowers. That has changed in subsequent years, and that the assumption, if you start off at the lower end of the economic scale, it is that much tougher to break out of it while in college and when you get out of college.

The fact seems to be that, if you have had a hard time getting a job before college, because of the environment you were in, the chances are that you will continue having a tough time getting a good paying job after the education because the opportunities simply do not present themselves that easily.

Does your study make any attempt to track what has happened to the population using NDSL since the advent of BOGE's? And you make the observation early in your statement, and again later, that you do not see any difference in the population being served by the two loans; you said that was a generalization. But if that is true, then the basic assumption with which we have been fighting the administration is faulty. We have been operating NDSL's as the principal source for income for the lowest income students on a college campus. If that is not the case then a strong part of the motivation for Chairman Perkins and others to fight for the lowinterest rate and continued capital investment goes out the window. If we cannot show a difference between the 3-percent money being supplied to NDSL and the more expensive money being supplied to GSL, except for accessibility, we do not have much of an argument for the continuation of the two separate programs.

What do you know from your studies so far about the change, if any, that has taken place from 1972 until the present in populations in using these respective programs?

Mr. FITT. We have not examined that thus far.

The problem is that the judgments about these programs are mostly intuitive because of the lack of comprehensive statistics. It is probable that the average family income of GSL borrowers is higher than the average income of NDSL borrowers, particularly so since the family income ceiling has been taken off the GSL program.

The only reasonably good statistics, as I mention in the statement, are with respect to NDSL borrower. We simply do not have income statistics any longer for GSL borrowers.

Mr. FORD. Wait a minute. Why do you say that? We really do not have any loans that have been made since the limit has been taken off.

Mr. FITT. $900 million worth.

Mr. FORD. That is against a $14 billion pot. What about the other $13 billion?

Mr. FITT. Not very much.

Mr. FORD. We know what the maximum was.

Mr. FITT. The most recent figures as I remember-

Mr. FORD. And everybody assumes low-income kids were not getting GSL's in the past so somewhere between the level of NDSL average borrower and the GSL average borrower there is a gap.

The assumption in your study is that the lower-income students were not being served by that program and will be served even less now with the changes in middle-income student assistance. But we put $13 billion-plus out there at a time when very detailed information was required. Why is it we do not know who it was who got the loans?

Mr. FITT. I do not know why the statistics have never been compiled or analyzed in a way that would permit accurate comparisons. The fact is they have not been compiled.

There is some information about first-time borrowers. I hesitate to say what the most recent year for that was. I think it was 1974, but I could be wrong on that. Basically we do not have-neither the Office of Education or anybody else has compiled those figures in a comprehensive way.

I did not mean to leave the impression that NDSL loans are no longer being made to young people who come from lower income backgrounds. I think that is true

Mr. FORD. But you did say the difference between somebody who gets it and does not get it is a matter of luck.

Mr. FITT. It depends on the institution you attend.

I will give you an anecdotal case involving a son of mine finishing his first year of law. He is an independent student. He received a $1,500 NDSL, his first year. This year he has a GSL loan. He has a summer job with a law firm at an annual rate that is about $30,000. When he graduates next year he will start at about $33,000. I do not regard him as needing a 3-percent loan for any part of his educational costs.

The point I tried to make in the statement was that the extra NDSL subsidy is really only available to people after they leave college, yet we base it on the family income of the student during his senior year in high school when that has nothing to do with his ability to repay after he leaves college.

There simply are no statistics available showing the comparative incomes of borrowers of NDSL or GSL when they actually begin to reach repayment and one pays 3 percent and one 7 percent. Most young people have to pay the 7 percent.

Mr. FORD. In preparing your study, have you inventoried the kind of statistical bases that might be available in the Office of Education, Sallie Mae, and other places which might answer any of the questions we have been discussing? We have never been able as a committee to get a satisfactory-at least from my perspective—a satisfactory explanation as to why it takes so long for anyone, this administration or the previous one, to get down to answering questions I have heard for years. Who gets the loans? Who gets hurt if we cut back? And what happens if we cut back? We ask the same questions every year when the budget comes up. In 1972, we were asking the question when BEOG's was passed. In 1976 we went through the same process. In 1978 we went through it again. And here we are again and we still do not know any more as to who gets the loans and who gets hurt if we adjust and tinker with them.

Some of us have had more exposure than we had 8 years ago and have more anecdotal information as to how it affects certain people. That is an imperfect way to effect legislation. You are saying CBO gets the same answers we get, which is a shrug of the shoulders and we do not know.

Mr. FITT. I cannot speak for the administration.

Mr. FORD. Where should we go to get the answers? You have raised very serious questions here which are not new questions to us, but they are restating the questions which have been asked. over and over again. Where would you suggest we go to get the answers to these questions?

Mr. FITT. I have tried with the Office of Education and with various private organizations which concern themselves with student loan matters, and I get the same answer everywhere I turn with respect to usable statistics in connection with family incomes of GSL borrowers.

If I could leave that point for a moment, the main message that I hope would come through in the statement was that you could make the present program serve the same population, whatever it is, for considerably less money than the Government is spending on it now. The issue of how much interest to charge a student borrower or how much to charge his family if there were a parental borrowing program, those are different issues that can be considered separately, but you can take the present program certainly on a preliminary basis and operate it at a substantially lower cost than the Congress is now paying, $12 billion a year-the taxpayer is paying.

Mr. FORD. One of your recommendations is to cut into the middleman profits. The Office of Education used an example of a cost of between $6,000 and $7,000 for each student loan we put out during the life of the loan. When it is broken down, one of the lowest costs is the default rate. The overwhelming portion of the cost is in the form of subsidies which do not go to students but to people in the money business. So one of their suggestions is that you bypass that level of profit, thereby changing from the original concept that you described in your statement.

I remember those discussions very vividly and there was a great deal of optimism on the part of some people on the committee that the banking industry was going to be so anxious to come forward with capital that we would have GSL money coming out of our ears. It never developed that way.

We have discovered what you say here in different ways about Sallie Mae, that in fact it has become a way of laundering Federal money in a way that we end up lending money to ourselves. In the process everybody who touches it makes something off of it and the student is still left with a loan to pay back, and the system is so complicated that everybody forgets that we started these programs for the purpose of buying education. We have not been able to talk about what kind of education we are buying because we have spent so much time in juggling interest figures, who will get the interest, who is going to guarantee the loans, that we have forgotten what we started out to do; we started out to make money available to students at the time they need it to purchase educational opportunity.