DEPARTMENTS OF LABOR, AND HEALTH, EDUCATION, AND WELFARE, AND RELATED AGENCIES APPROPRIATIONS FOR FISCAL YEAR 1967 MONDAY, MARCH 7, 1966 U.S. SENATE, SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS, Washington, D.C. The subcommittee met at 10:30 a.m., in room 1318, New Senate DEPARTMENT OF HEALTH, EDUCATION, AND OFFICE OF EDUCATION STUDENT LOAN INSURANCE FUND STATEMENTS OF PETER P. MUIRHEAD, ASSOCIATE COMMISSIONER FOR HIGHER EDUCATION; ACCOMPANIED BY S. WILLIAM HERRELL, EXECUTIVE OFFICER, BUREAU OF HIGHER EDUCATION; NORMAN KARSH, ASSISTANT COMMISSIONER FOR ADMINISTRATION; JOE G. KEEN, BUDGET OFFICER; AND JAMES F. KELLY, DEPARTMENT COMPTROLLER APPROPRIATION ESTIMATE "STUDENT LOAN INSURANCE FUND "For the Student Loan Insurance Fund created by section 431 of the Higher Education Act of 1965 (79 Stat. 1245) and the Vocational Student Loan Insurance Fund created by section 138 of the National Vocational Student Loan Insurance Act of 1965 (79 Stat. 1046), $3,200,000, to remain available until expended: Provided, That said funds shall be merged into one account." An increase of $2,700,000 is requested under the Higher Education and the National Vocational Student Loan Insurance Acts of 1965 so that the Office of Education may insure loans of students without access to State or private nonprofit insurance programs. This amount includes $2,500,000 to insure an additional 5,000 higher education student loans averaging $500, for a total of 6,000 new loans in 1967, and $200,000 to increase the vocational student loans from an average of $200 in 1966 to $400 in 1967 for 5,000 new loans each year. Under the Higher Education Act of 1965 and the National Vocational Student Loan Insurance Act of 1965, the Office of Education received authority to insure loans of students in eligible institutions which do not have reasonable access to a State or private nonprofit program of student loan insurance. In 1966 $500,000 was appropriated for the higher education student loan insurance fund, and $50,000 is being requested for the vocational student loan insurance fund in a 1966 supplemental under "Expansion and improvement of Vocational education." These funds are being merged and will be known henceforth as the student loan insurance fund. It is anticipated that most loans will be guaranteed by a State or private nonprofit agency, but the Federal Government must stand ready to provide an insured loan plan if these other sources do not adequately serve the purposes of the acts. Defaults on any federally insured loans would be very small during the first year and would probably result only from the death of the borrower. At this time it is unknown whether those States which do not now have a plan will initiate a State plan or whether the private plans will have sufficient guarantee funds to meet the demands. Therefore, an amount of $3,200,000 is requested for 1967 to enable the Federal Government to establish a modest insurance fund from which insured lenders would be paid when any of their student loans were in default. Of the total, $3 million is included for higher education loans and $200,000 for vocational student loans. In addition to the amounts appropriated, lenders will pay into this fund an insurance premium of one-fourth of 1 percent per annum of the unpaid principle amount of the loan. All insurance premiums and interest earned on the fund will be retained in the fund to meet additional requirements for payments of defaulted loans. The fund may borrow from the Treasury if at any time the moneys available are insufficient to make payments on defaults of insured loans. It is estimated that the appropriation requested will make it unnecessary to utilize this authority in 1967. The fund will take over loans on which it pays insurance claims and seek to collect on them, but the schedules reflect a full reserve for losses on such loans. It is anticipated that 6,000 higher education student loans averaging $500 will be insured in 1967, compared to 1,000 loans averaging $500 in 1966; and that 5.000 vocational student loans averaging $400 will be insured in 1967, compared to 5,000 averaging $200 each in 1966. Senator HILL. The subcommittee will please come to order. We are glad to have Dr. Peter Muirhead, Associate Commissioner for Higher Education, here. He will address himself to the student loan insurance fund. All right, Dr. Muirhead. Dr. MUIRHEAD. Mr. Chairman and members of the committee, we are requesting $3,200,000 for the student loan insurance fund for 1967, an increase of $2,700,000 over 1966. Under the programs authorized by the Higher Education and the National Vocational Student Loan Insurance Acts of 1965, those eligible students who do not have access to a guaranteed loan program of a State or nonprofit agency can obtain insurance on loans directly from the Federal Government. Although it is anticipated that most students will be able to obtain insured loans through non-Federal sources, we do not have enough information at this time as to whether guarantee funds from those sources will be available to all students. Therefore, we are requesting $3 million to insure loans for 60,000 higher education students, assuming an average loan of $500, and $200,000 to insure loans for 5,000 vocational students, at an average loan of $400. This is submitted as a separate account, since a revolving fund must be established in order to collect the insurance premiums and to invest unused funds in U.S. securities. This request will complete the coverage of insured loans for both Vocational and higher educational students who need such assistance in order to pursue their studies. We will be happy to answer any questions you may have. If I may, Mr. Chairman, I should say at this time that this particular request is to set up an insurance fund for the Federal insurance programs of the guaranteed loans programs. This money would make it possible in those cases where guaranteed loans were not available through State agencies or nonprofit agencies, for the Federal Government directly to insure a loan at a bank. Senator HILL. Loan from a bank or some other private agency? Mr. MUIRHEAD. Yes, sir; from a bank or some other private agency. Senator HILL. Your figures involve a considerable amount of money. Are you going to put into this fund the overall loan you expect to make, a total amount? How much are you putting into the fund? AMOUNT OF REQUEST Mr. MUIRHEAD. In this particular instance, we are putting in $3,200,000 for the Federal student loan insurance fund. Mr. Chairman, I think we have to look at this along with the other request that we are making for the State guaranteed program, and for the nonprofit private agency guaranteed program. As you know, of course, we are submitting requests for $43 million for the other guaranteed loan programs. This particular program is for a standby authority in the event that the State guaranteed programs do not pick up all of the loan needs of the students. TOTAL AMOUNT NEEDED FOR LOAN PROGRAMS Senator HILL. Do not pick up all of the loan needs. Well, how much more do you need to pick up all of the loan needs? Mr. MUIRHEAD. There are several items that I would have to report on. We have, as you know, at the present time a National Defense Education Act student loan program, of which you are one of the principal architects, sir. And that program has been operating for 7 or 8 years now. There is legislation now before the Congress, Mr. Chairman, that would continue that program during the next fiscal year, continue it at an appropriation of $150 million, but with an opportunity to go to the full authorization of $190 million. In addition to that, because the guaranteed loan program extends loan opportunities to a much larger population than does the NDEA program, there is a request before you for $43 million to carry out the provisions of the guaranteed loan program, under the program for higher educational activities, which would extend loan opportunities to young people from families earning less than $15,000 adjusted income. Senator HILL. You expect the Congress to appropriate this $43 million out of the Treasury? Do you want an appropriation of that amount of money? LOANS UNDER GUARANTEED LOAN PROGRAM Mr. MUIRHEAD. Yes. The $43 million for the guaranteed loan program, that is right. Senator HILL. Well, is that full amount that you expect to be loaned under the guaranteed loan program? Mr. MUIRHEAD. The full amount that we expect to be loaned out of the guaranteed loan program would be Senator HILL. How much? Mr. MUIRHEAD. Under the guaranteed loan program, we would expect to have $775 million in loans, which the advanced funds that I mentioned before would help to support. Senator COTTON. You mean to pay the interest? Mr. MUIRHEAD. To do two things. To pay the interests, and to provide the guarantee funds. In making bank loans, quite understandably the bank requires there be guaranty funds standing back of the loan. The ratio that has been recommended by the banks is 1 to 10. If you have a million dollars in guaranty funds, then $10 million in loans can be supported. Senator COTTON. Well, it is interesting to me that the banks require the appropriation of money for a guaranteed fund. The Government's guarantee of the payment of an obligation which may be in default by the student responsible would seem to me to be just as reliable as the Government's guarantee of a promise to pay social security recipients. To be sure, the social security fund is an earmarked fund, and is a trust fund, but even though the trust fund isn't sufficient to meet obligations of the future, the word of the United States that it will meet them has always seemed sufficient, rather than to appropriate some funds, and then what do you do with them. You don't invest them as a private trustee, you don't buy bonds and stocks in private industry, you buy your own Government bonds. So we always figure that if the U.S. Government by act of Congress by authorization agreed to make up the deficit, that should be enough. I understand the money to meet the interest-and I am going to ask in a minute about any added expense to the administration-but I don't quite get this business of the banks insisting on appropriations. REQUIREMENT FOR GUARANTEED FUND Mr. MUIRHEAD. I think the answer lies in that the legislation which establishes the guaranteed fund sets forth that, in so far as possible, these guaranteed funds shall be alloted to State guarantee agencies and through nonprofit private student loan agencies, rather than directly by the Federal Government. Under those circumstances, then, it seems that the State does have to have a guaranteed fund in its relationship with the banks. And it is to the establishment of that guaranteed fund that these funds will be directed. I would hasten to say, Senator, that the amount of money that we have suggested here for the State guaranteed funds is considerably short of what is needed to establish a guaranteed fund in all of the States. The principle here being the one that all of us support, and that is that these funds should be used to stimulate State activity rather than to supplant State activity. Now, you're quite right that insofar as it is a direct Federal guarantee between the Federal Government and the bank making a loan to the student, that there is not the same need for a guaranteed fund as would obtain if it were a State-operated program. |