REAUTHORIZATION OF THE HIGHER EDUCATION ACT AND RELATED MEASURES

Part 6-Student Financial Assistance: Loans

TUESDAY, JUNE 5, 1979

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON POSTSECONDARY EDUCATION,
COMMITTEE ON EDUCATION AND LABOR,

Washington, D.C.

The subcommittee met, pursuant to notice, at 9:40 a.m., in room 304, Cannon House Office Building, Hon. William D. Ford (chairman of the subcommittee) presiding.

Members present: Representatives Ford, Peyser, Weiss, Buchanan, Tauke and Ratchford.

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

Mr. PEYSER [presiding]. The Subcommittee on Postsecondary Education will come to order for the purpose of continuing hearings on the Reauthorization of the Higher Education Act and Related Measures.

Today's hearing will continue our consideration of the student financial assistance programs authorized by title IV of the Higher Education Act.

In our two hearings last week, we began consideration of the student loan programs-the guaranteed student loan program and the national direct student loan program. Our hearing this morning will continue and conclude that topic.

Our witnesses this morning will include Members of Congress, representatives of the Student Loan Marketing Association, and representatives of associations of postsecondary institutions.

Our chairman, Mr. Ford, will be joining us shortly, but in the interest of moving ahead with the hearings and allowing the proper time, we are going to start the hearings off, and the first speaker this morning is going to be the Honorable Neal Smith, a Member of Congress from Iowa, who we are delighted to have appear before our committee. He certainly has expressed great interest in this area in the past, and we welcome him and would like him to start in at this time. As you know, your prepared text will be entered in the record. If you wish to speak from it, fine, or however you would like to proceed.

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STATEMENT OF HON. NEAL SMITH, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF IOWA

Mr. SMITH. Mr. Chairman, I think it would be quicker if I just speak from the record, because it is only four pages, and I might discourse a little longer than that if I tried to summarize it.

I do appreciate appearing before the subcommittee.

The ability of parents to finance the increasing cost of post high school education for their children has been seriously eroded by the higher tuition costs and a higher cost of living for students. Costs of providing higher education have increased so much that college administrators are finding it necessary to increase tuition rates even more each year, and it appears living costs will not stabilize; therefore, there is sure to be a continuing great need for a simplified, practical and effective loan program to supplement other forms of support.

For many years, including years which I served on this committee, I have introduced bills and urged support of legislation which would, in effect, establish a very substantial student aid loan bank. To some extent, it would be like a greatly enlarged NDEA student loan program but would contain some important differences including no interest on amounts paid until due and an alternate repayment schedule geared to income. I might mention when I served on this committee the full committee adopted this one day. Ribicoff was the Secretary of HEW at the time. It wasn't their plan and for some reason they went to work and in a couple of days they got two votes to switch. That is how close it came in 1961 to becoming a part of the Higher Education Act. This year, the bill number is H.R. 750.

I believe that every student at a college or training institute is entitled to receive an interest-free loan to the extent he or she needs it to secure needed training or an education and that there should be a method of repayment available which will not cause hardship during the years of repayment or result in graduates being delinquent in payments through no fault of their own.

That approach has not been tried under either the NDEA or guaranteed loan program. The guaranteed loan program depends upon banks to make the student loans carrying substantial rates of interest and to be repaid on a rigid schedule. The Budget Bureau simply cannot resist the temptation to depend upon this program as the principal source for student aid. During the first years, a small amount appears in the current year's budget as the cost for operating the program but over a period of years the cost of this program is substantially greater for both the Government and the student than it would be if loans were made directly.

We are also finding that banks simply are not suitable institutions for making student loans. In fact, many have either never participated or have quit or limit loans to children of good customers who need the loans the least. There is no way to make the bank guaranteed loan compare favorably with direct loans for students. To start with, bankers have told me that from a competitive standpoint they really need a minimum of 16 percent interest rate on these loans. They can buy Government securities on a day-today basis with 24-hour liquidation privileges that pay more than 9 percent, and they can be purchased in a few minutes by one officer

of the bank in sums totaling millions of dollars, depending upon the surplus available for this purpose on that day. Student loans require a vast amount of time to service. By the time repayment is made, the student probably does not live in the same community. Even with a secondary market, more of their money would be idle during transfer periods than with the Government bonds, and there are probably as many negatives as positives from the public relations standpoint. Not only does it work less efficiently, cost more for the Government and is more complicated, but it also results in greater cost and trouble to the student receiving the loan. In addition to all these problems, loans simply are not available in some communities while they are in other communities. The plain fact of the matter is that this program is not working satisfactorily, and there is really no substitute for having a substantial direct loan program which is available and fair to all students and graduates without regard to the major course of study pursued.

Under my proposal, loans would be interest-free. The net effect of this would be to provide what amounts to about a 25-to-50 percent scholarship. Although many people feel it is unfair for the Federal Government to loan thousands of dollars to some students who happen to go to college, it is really an investment because they will, upon graduation, earn more money and should, therefore, pay more income taxes. The value of the loan approach is also shown by the fact that this year $411 million in money that was loaned in previous years under the NDEA program will be repaid and will be reloaned a second time. On the average, the former students who repaid this money this year are receiving a salary which is enough greater than they would have received had they not secured the advanced education, so that they are also far ahead even after using some of the increase to repay the loan.

While on an average the ability to repay even on a rigid schedule of 10 percent per year, and even when the interest is added is satisfactory, there are individual cases where hardship is incurred by using a rigid repayment schedule, and there are individual cases where students were discouraged from going to college or securing advanced training because they did not want to tie themselves down to a rigid payment schedule. This is especially true with some young women who do not know what years they will want to work while raising a family and have a reluctance to become indebted prior to marriage.

These problems can be answered by providing that, as an alternative, a student can repay at the rate of 5 percent of his or her net taxable income. Whenever they are not working, no repayment is necessary. Since the loan is interest-free, years when they are not working or have too low an income to have paid 10 percent of their total debt will not result in an increase in the debt or being classified as delinquent. Especially in the case of nurses and teachers, we are going to depend heavily upon married women who have partially raised their family and who will not work in several of the years following graduation from college or a training institute. H.R. 750 would make it much more fair for them and would encourage them to secure the education and training at the proper time in life, even if they do not use it until after their children are

raised or in high school. This approach will encourage increased development of great human resources.

Burdensome paperwork would not be required because the borrower would merely file a certificate stating that the amount remitted is at least 5 percent of his or her net taxable income. Under this approach, most of those who have been delinquent under the present NDEA and guaranteed loan approach would be current on repayments and hardship for some others could have been avoided. I strongly urge the establishment of the student loan bank provided in H.R. 750 as a practical, simple, direct, efficient, and effective way to deal with supplemental student aid on a broad basis which can be sold to the Congress.

Thank you for the opportunity to appear before this subcommittee, upon which I once had the honor to serve and which I still believe has provided some of the most important legislation to the long-term growth and strength of our country.

Thank you.

[H.R. 750 introduced by Cong. Smith appears in the Appendix.] Mr. PEYSER. Thank you very much for both the excellent presentation and also for the thought here involved.

There is one question I would like to ask. Have you, Neal, any specific thought in mind of amount, if you were to establish this student aid loan bank, of the kind of dollars we would be-

Mr. SMITH. I think that would depend upon the demand. This year, there is $411 million available in repayments to NDEA, plus we put in $286 million on top of that. That is $697 million; that is about $700 per student. I would visualize if we had this kind of a program there would be so much demand for it that the demand would probably triple. You would also have less demand-we put $550 million in now for the opportunity grants, and then we have a work study program. We put, I think, $550 million for that.

A good number of those students are not working. It is really bad, too, in a way; for those who have a job it is a great program, but whenever a professor, in order to get a student the money he absolutely needs, has to fraudulently claim he is giving him a job, that is not good for either the student or the professor. We wouldn't need that program.

Mr. PEYSER. Basically, you see this as a replacement for programs like work study.

Mr. SMITH. Yes; between the two, anyone that wants to, can go to school. You still have a work study program for those, to the extent colleges can genuinely use their time.

Mr. PEYSER. Thank you very much.

Mr. Buchanan?

Mr. BUCHANAN. Thank you, Mr. Chairman.

First, I want to state that the gentleman from Iowa is a valued and distinguished friend of education. As much as we regret not having you on this committee, I am glad you are where you are, because funding, as you are aware, is a perpetual problem in trying to devise how we shall assist the students. Inadequate funding seems to force us into too many unfortunate and sometimes draconian choices.

As you are aware, one of the problems we face in all the loan programs is the high default rate. With NDEA, it is right at 18 percent, which is higher than the GSL default rate. There are

those who feel that this is true at least in part because of the very low interest rates now on NDSL, so I wonder if the removal of even that would have an adverse impact on incentive to repay.

Mr. SMITH. No, I think, myself, and I believe the Secretary agrees with this-you know he has tried to do something to get these repayments back-and on our committee we are pretty much convinced that a large share of it is due to the rigid 10 percent repayment schedule. See, a student is out here, and 1 year they can't make the payment. Then they miss that payment, and once you miss one payment and nothing happens, you probably miss the rest of them. Then a friend finds out that their friend isn't repaying, so why not do the same thing. I just think that a large share of it is due to the fact we have set up an unrealistic repayment schedule of 10 percent per year for lifetime investment. We don't pay for houses 10 percent a year. This is an investment in their whole future, and I think it is an unrealistic repayment schedule. The other thing is that the repayment defaults naturally come higher in lower-paid jobs. A student chooses social services as their field. The ability to repay is not nearly as great, although the cost of education is as much as it is in some other field. That is not realistic, either. By having a percentage of their income as the method of repaying, you have taken care of those problems, and I think the delinquency rate would be nil.

Mr. BUCHANAN. I was intrigued that Secretary Califano in his testimony portrayed and gave us examples of how a bank could make 24 percent, 27 percent profit on a student loan, and ABA's representative testified that these really were not profitable loans over against what a bank could otherwise do with the money it is paying to lend.

Mr. SMITH. Bankers I have talked to over the years tell me it is not really a profitable business. They do it in some instances because they think they need to; they have customers who want them to make a loan to their child, or for one reason or another, but I don't believe they are making money on these loans, or that they are really in the right kind of a business because a bank likes to make a loan and get a chattel mortgage on something that is going to stay in the vicinity of the bank, where they can see it every day they want to. They are not going to see the student after he graduates. It is just not the kind of business that a bank is normally in.

Mr. BUCHANAN. Thank you. I appreciate so much your testimony.

Thank you, Mr. Chairman.

Mr. PEYSER. Thank you.

Mr. Ratchford?

Mr. RATCHFORD. Chairman Smith, we appreciate your thoughtful statement. As a former member of this committee, what is your thinking as relates to the current number of programs we have? Mr. SMITH. I think there are too many.

Mr. RATCHFORD. I agree we have too many, that they overlap and are duplicative and confusing.

Would your legislation add to one of the current seven programs or consolidate them?